Answer to Question #315749 in Macroeconomics for Vibhu

Question

How are the Exchange rate Determined ? What are the reasons in fluctuations in the exchange rate ? How the monetary policy of a country affect the exchange rate ?

Answer 1

Exchange rate is determined by the government through its central bank. The rate is set against another significant world money (like the U.S. dollar, euro, or yen). To keep up with its swapping scale, the public authority will trade its own cash against the money to which it is fixed. Most of the world's monetary standards are traded in light of adaptable trade rates, meaning their costs vary in view of the market interest in the unfamiliar trade market. Expanded interest for a specific cash or a deficiency in its accessibility will bring about a cost increment. When the government or Federal Reserve uses monetary or fiscal policy to expand the economy, this increases our income and our demand for imports, and ultimately lowers the exchange rate.