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Causes Of Changes In A Floating Exchange Rate: Demand And Supply Of The Currency

Economics notes

Causes Of Changes In A Floating Exchange Rate: Demand And Supply Of The Currency

➡️ Depreciation of a floating exchange rate occurs when the value of a currency decreases relative to another currency. This can be caused by a variety of factors, such as a decrease in demand for the currency, an increase in the supply of the currency, or a decrease in the country's economic performance.
➡️ Appreciation of a floating exchange rate occurs when the value of a currency increases relative to another currency. This can be caused by a variety of factors, such as an increase in demand for the currency, a decrease in the supply of the currency, or an increase in the country's economic performance.
➡️ The distinction between depreciation and appreciation of a floating exchange rate is important for businesses and investors, as it can have a significant impact on their profits and losses. For example, if a business imports goods from a country whose currency has appreciated, it may have to pay more for the goods than it would have previously. Conversely, if a business exports goods to a country whose currency has depreciated, it may receive more money for the goods than it would have previously.

What factors influence the demand for a currency in a floating exchange rate system?

The demand for a currency is influenced by a variety of factors, including the country's economic performance, interest rates, political stability, and investor sentiment. For example, if a country's economy is growing and its interest rates are high, investors may be more likely to demand its currency, driving up its value.

How does a change in the supply of a currency affect its exchange rate in a floating exchange rate system?

An increase in the supply of a currency can lead to a decrease in its value relative to other currencies, as there is more of it available on the market. Conversely, a decrease in the supply of a currency can lead to an increase in its value. Factors that can affect the supply of a currency include changes in government policy, such as central bank interventions or changes in trade policies.

What are some potential consequences of changes in a floating exchange rate on a country's economy?

Changes in a floating exchange rate can have a range of consequences for a country's economy, depending on the direction and magnitude of the change. For example, a depreciation of a country's currency can make its exports more competitive on the global market, potentially boosting economic growth. However, it can also lead to higher inflation and increased costs for imported goods. On the other hand, an appreciation of a country's currency can make imports cheaper, but can also make exports less competitive and potentially harm economic growth.

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