Exchange Rate Determination

4 important questions on Exchange Rate Determination

1. What four key factors determine long-run exchange rates either appreciating or depreciating? Explain one of the factors in full. (Rising or falling prices, Increasing, or decreasing productivity levels, Preferences of goods increasing or decreasing, Trade barriers increasing or decreasing):

Long term:
  • Flows of goods, services, and investment capital (0ne / two or more years)
  • Inflation rates, investment profitability, consumer tastes, productivity, and government trade policy.

4. Increase in the U.S. price level relative to price levels in other countries:

  • Increase in the demand for foreign currency.
  • Decrease in the supply of foreign currency.
  • Depreciation of the dollar.

6. An increased demand for U.S. exports:

  • Appreciation of the dollar.
  • An increased demand for U.S. imports.
  • Depreciation of the dollar.
  • The U.S. imposes trade barriers.
  • Appreciation of the dollar.
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9. What factors affect the exchange rate in the short run, either appreciating or depreciating?

See the table in the notes.

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