ucture.com/courses/2392664/discussion topics/14120842 This is a graded discussio

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ucture.com/courses/2392664/discussion topics/14120842 This is a graded discussion: 40 points possible Chapter 10 Discussion By the end of Chapter 10, you should understand: due Sep nominal and real exchange rates the relationship of exchange rates, the price level, and inflation currency supply and demand government intervention in the foreign exchange market This discussion question has several parts, Give each explanation in a complete paragraph form. Your post is worth up to 30 points. . When responding to the posts of others, pick one item that you can add significant thought to and address that concept in your post. Each of two responses you make are worth up to 5 points each. i) Explain exchange rate, currency depreciation, and currency appreciation. li) Why and how might government intervene in the foreign exchange market? Unread

Explanation / Answer

Exchange rate refers to the price of one currency in terms of another currency which is known as the base currency. It may be direct or indirect. In a direct quotation the price of foreign currency is expressed in terms of the domestic currency and Vice Versa in an indirect quote. If one currency decreases in value as compared to the base currency it is known as depreciation of the currency and if the currency increases in value as compared to the base currency it is known as appreciation of the currency.

In some countries where there is a fixed exchange rate the government can intervene by changing the rate directly. In other countries The government can influence the exchange rate by manipulating the interest rates. For instance if the government increases the interest rate it makes the domestic country stronger as compared to other countries. This is because the domestic currency will generate a higher return and hence its demand will increase. Similarly the government can reduce the interest rate which will lower the return on the assets denominated in the domestic currency and so its demand will reduce. This will depreciate the currency.

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