What are the determinants of real exchange rate?
What are the determinants of real exchange rate?
The real exchange rate reacts to a series of real and nominal disturbances, including international terms of trade shocks, government expenditure patterns, trade restrictions, net capital inflow, foreign aid flow and technological progress, as well as to expansionary macroeconomic policies and nominal devaluation.
How does exchange rate affect capital flow?
Appreciation of the real exchange rate undermines competitiveness, widens the current account deficit, and increases vulnerability to a financial crisis. Significant appreciation could lead to a sudden drying up of capital flows, causing an abrupt adjustment of the current account.
What factors affect the nominal exchange rate in the long run?
In the long run, exchange rates are determined by PPP (as described above) and relative differences in productivity, trade barriers, and import and export demand.
What is the equilibrium exchange rate?
The equilibrium exchange rate is the long-term exchange rate that equals the purchasing power parity (PPP) of a currency in a world where all goods are traded and where markets are fully efficient.
Which factors are the main determinants of real exchange rate explain with details how changes in these factors affect the real exchange rate with reasoning?
Exchange rates are determined by factors, such as interest rates, confidence, the current account on balance of payments, economic growth and relative inflation rates.
Why do you think fixed exchange rate can lead to instability in economy?
A stable system allows importers, exporters, and investors to plan without worrying about currency moves. However, a fixed-rate system limits a central bank’s ability to adjust interest rates as needed for economic growth. A fixed-rate system also prevents market adjustments when a currency becomes over or undervalued.
What factors affect currency exchange rates?
9 Factors That Influence Currency Exchange Rates
- Inflation. Inflation is the relative purchasing power of a currency compared to other currencies.
- Interest Rates.
- Public Debt.
- Political Stability.
- Economic Health.
- Balance of Trade.
- Current Account Deficit.
- Confidence/ Speculation.
How exchange rate is determined?
In a floating regime, exchange rates are generally determined by the market forces of supply and demand for foreign exchange. For many years, floating exchange rates have been the regime used by the world’s major currencies – that is, the US dollar, the euro area’s euro, the Japanese yen and the UK pound sterling.
What determines the real exchange rate and the nominal exchange rate in the long run?
The exchange rate is determined in the long run by prices, which are determined by the relative supply of money across countries and the relative real demand of money across countries.
What are the three main factors that affect currency exchange rates among countries?
The three main factors that affect currency exchange rates among countries. Balance of payments, economic conditions, and political stability.
How are exchange rates determined?
How is the equilibrium exchange rate determined?
It is also called ‘free exchange rate’ as it is determined by the free play of supply and demand forces in the international money market. Thus, equilibrium exchange rate is determined when the demand and supply for foreign exchange becomes equal.
