Answer to Question #209591 in Marketing for saleemaslam

Question

1.     Explain how productivity affects exchange rates in the long-run.

 

Answer:

 

 

 

 

 

 2.     Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

 

Answer: 

Answer 1

Explain how productivity affects exchange rates in the long run.

Exchange rate refers to the rate at which one currency can be converted into the other. It is normally determined by the intersection of the supply curve and demand curve for foreign currency. When a nation has higher productivity above other countries, the prices of commodities therein decline in the world market, hence an appreciation of the currency and higher exchange rate which does not negatively affect the exportation of commodities. When a country has low productivity, then the prices increase pushing the currency to depreciate to promote imports.

Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

An increase in the expected exchange rate on the equilibrium exchange rate means that investors expected the currency to appreciate. with this increase, it means that the value of the currency is about to decline. An expectation that there will be an increase in the exchange rate is likely to strengthen in the future will lead to greater demand for the peso in the present from investors who wish to benefit from the appreciation. Similarly, it will make investors less likely to supply currency to the foreign exchange market. Both the shift of demand to the right and the shift of supply to the left cause an immediate appreciation in the exchange rate.