BUS138: INTERNATIONAL FINANCE
EXCHANGE RATE DETERMINATION

Factors that affect exchange rates! How are each of the factors (events) below expected to affect exchange rates? Why?

1. Increase in foreign imports and an increase in trade deficits
The exchange rates will increase. Because the trade deficits made a great demand of dollar, dollar became going up and the exchange rate will increase.

2. Increase in government budget deficits
The exchange rates will increase. Because the government budget deficits will lead to the BOP deficits, as a result, the purchasing power of dollar will decrease and the demand of foreign currencies will increase, then the exchange rate will go up.

3. Inflation
The exchange rates will increase. Because of the decline of the purchasing power of dollar, the demand of foreign currencies will go up.

4. Government provides tax breaks and other incentives for capital spending
The exchange rate will decrease. Because these fiscal tools lead to a increasing purchasing power of dollar.

5. Good stock market performance (Dow Jones Index goes up)
The exchange rates will decrease. Because the good stock market performance attract more foreign investors to buy dollars.

6. Government announcements an intention to intervene in foreign exchange markets to weaken a currency.

The exchange rate will decrease. Because the currency which is weakened, the foreign exchange rate will decrease relatively.

7. Monetary growth
The exchange rate will increase. Because of the great supply of dollar, the value per dollar will decrease and finally, the exchange rate will increase on the contray.

8. Increase in GNP and real economic growth
The exchange rate will decrease. Because of the increase in GNP and a real economic growth, the nation will attract more and more