1. Q1. Why is the relationship between the prices,interest rates and exchange rates at equilibrium?
Please briefly explain?
Q1. Why is the relationship between the prices,interest rates and exchange rates at equilibrium?
Please briefly explain?
Solution
The demand & supply of money are the determinants of exchange rates. Change in interest rate
affect a country's currency.
Higher interest rate leads to an increase in the demand for a currency whereas lower interest rate
reduces demand for the currency.
An increase in the supply of a currency depresses its price.
Therefore there is a direct relationship between price, interest rate & exchange rate.
If the price interest rate increases the price & exchange rate will also increase & Vice Versa.
Therefore; the realtionship is at equilibrium