exchange rate economics with free floats

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Exchange Rate Economics Authors Name Institution Affiliation Exchange Rate Economics Introduction Overview of Exchange Rates Exchange rates are simply an expression of a countries’ national currency in respect foreign currencies. Therefore, exchange rates are ratios, multipliers, or conversion factors with regard to direction of currency conversion. Exchange rates are dependent on economic aspects such as balance of payment equilibrium, economic growth, interest rates, and relative inflation rates among other factors. The relative change in these factors determine the value of each nation’s currency against other currencies in the international market. A change in one of these economic variables can lead to either depreciation or appreciation of currency. • Depreciation of currency is the decrease in a currency' s value relative to the value of another currency. If the domestic currency falls in value relative to foreign currency, it buys a smaller quantity of the foreign currency. For example, if £1 used to be equivalent to $2 and now £1 is equal to $1.75. In this scenario, purchasing goods from USA becomes costly therefore reducing American exports to UK and increasing UK exports to America leading to cost push and demand pull inflation in the UK. In summary, A currency depreciation in exchange rates increases the price of imports while exports become increasingly competitive in the international market. • Appreciation of currency is the increase in a currency’s value relative to the value of another currency. In the case of US dollar ($) versus Pounds (£), if the value of pounds appreciate in the forex market, US imports will be cheaper for

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