Inflation Rates essays

Inflation Rates essays The price of one currency in terms of another is called the exchange rate. The exchange rate affects the economy in our daily lives because it affects the price of domestically produced goods sold abroad and the cost of foreign goods bought domestically. Mexicans use pesos, French use francs, Austrians use schillings, and this use of different monies by different countries results in the need to exchange one money for another to facilitate trade between countries(Husted 315). Without the exchange rate it would make it impossible to purchase goods in other countries that have a different currency. Day-to-day movements in exchange rates are closely related to peoples expectations. The role of monetary policy would be to manage the exchange rate. A monetary expansion would tend to lower interest rates, thus lead to short-term funds flowing into foreign currencies, and so depreciate the domestic currency(Corden 21). Throughout the history of the economy, the exchange rate has not always been controlled under the same monetary system. Foreign exchange is usually traded as bank accounts denominated in different currencies. Most of the trade takes place between the major banks and between banks and their corporate customers. Modern communications make it a truly global market. The rates vary by minute. Exchange rates changes are largely unexpected and so there is an important element of risk in multinational transactions that domestic transactions lack(Husted 320). The closing rates in each financial center are reported regularly in the media. The closing rates of the previous day are listed in the morning newspaper for leisurely reading. There are two ma in types of foreign exchange systems: 1) fixed exchange rate, and 2) floating exchange rate. A fixed exchange rate system is where governments can set a certain fixed rate at which their currencies will exchange for each other and then ...