How do changes in interest rates, inflation, productivity, and income affect exchange rates? Is a strong...
How do changes in interest rates, inflation, productivity, and income affect exchange rates? Is a strong U.S. dollar effective for worldwide economies? Why or why not?
Homework Answers
Answer: The exchange rate is governed by the supply and demand f the currency. If a country has high interest rate, the demand of the currency will increase as the investors will be attracted in investment. If the country’s inflation is high, the value of the currency will decrease over time. High productivity and high exports will also lead in increase in demand of the currency. As the demand of the currency will increase the exchange rate will increase or vice-versa.
A strong dollar is not always good for US and global economy. As
strong dollar will discourage exports and result in trade deficit.
A strong dollar makes foreign goods seem cheaper, so we buy
more.
Explanation:
Interest Rates ↑ → Stronger USD (investors chase higher returns).
Inflation ↑ → Weaker USD (money loses value).
Productivity ↑ → Stronger USD (better exports).
Income ↑ → Weaker USD (more imports).
Strong Dollar Effects:
Good: Cheaper U.S. imports for others.
Bad: Hurts foreign exporters; emerging markets struggle with dollar debts.
Verdict: Helpful in moderation, harmful if extreme.
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