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Explain How Interest Rates Can Affect Supply and Demand

Higher interest rates in a country generally increase the value of that country's currency relative to others by attracting more foreign investment and increasing demand. However, this is complicated by inflation - higher rates won't increase a currency's value if inflation also rises. Higher inflation reduces a currency's value in foreign exchange as it makes the country's goods and assets less attractive. Accurately forecasting exchange rate movements allows firms to benefit through financial planning and currency hedging to mitigate exchange rate risk.

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26 views2 pages

Explain How Interest Rates Can Affect Supply and Demand

Higher interest rates in a country generally increase the value of that country's currency relative to others by attracting more foreign investment and increasing demand. However, this is complicated by inflation - higher rates won't increase a currency's value if inflation also rises. Higher inflation reduces a currency's value in foreign exchange as it makes the country's goods and assets less attractive. Accurately forecasting exchange rate movements allows firms to benefit through financial planning and currency hedging to mitigate exchange rate risk.

Uploaded by

hafeez ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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briefly explain how increase or decrease in interest rate and inflation rate in one

country effect the demand supply and equilibrium value of the currency of
country relative to other country's currency

Explain how interest rates can affect supply and demand

The laws of demand and supply continue to apply in the financial markets. According to the law of
demand, a higher rate of return (that is, a higher price) will decrease the quantity demanded. As the
interest rate rises, consumers will reduce the quantity that they borrow. According to the law of supply,
a higher price increases the quantity supplied. Consequently, as the interest rate paid on credit card
borrowing rises, more firms will be eager to issue credit cards and to encourage customers to use them.
Conversely, if the interest rate on credit cards falls, the quantity of financial capital supplied in the credit
card market will decrease and the quantity demanded will fall.

Explain how inflation can affect supply and demand

how increase or decrease in interest rate equilibrium value of the currency of


country relative to other country's currency

Generally, higher interest rates increase the value of a country's currency. Higher interest rates
tend to attract foreign investment, increasing the demand for and value of the home country's
currency. Conversely, lower interest rates tend to be unattractive for foreign investment and
decrease the currency's relative value. This simple occurrence is complicated by a host of other
factors that impact currency value and exchange rates. One of the primary complicating factors is
the relationship that exists between higher interest rates and inflation. If a country can achieve a
successful balance of increased interest rates without an accompanying increase in inflation, its
currency's value and exchange rate are more likely to rise.

how increase or decrease in inflation equilibrium value of the currency of


country relative to other country's currency
The rate of inflation in a country can have a major impact on the value of the country's currency
and the rates of foreign exchange it has with the currencies of other nations. However, inflation
is just one factor among many that combine to influence a country's exchange rate.

Inflation is more likely to have a significant negative effect, rather than a significant positive
effect, on a currency's value and foreign exchange rate. A very low rate of inflation does not
guarantee a favorable exchange rate for a country, but an extremely high inflation rate is very
likely to impact the country's exchange rates with other nations negatively.

Explain how firms can benefit from forecasting exchange rates?

Ans. See from screen short

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