Question

Explain exchange rate and list any two factors affecting exchange rates.

Hint:

Remember: A currency's exchange rate is influenced by factors like inflation and interest rates, which affect the demand and supply of currencies in foreign exchange markets.

Answer 1

Step 1: Define exchange rate.
An exchange rate is the value of one currency in terms of another currency. It indicates how much of one currency is required to purchase a unit of another currency.
Step 2: List the factors affecting exchange rates.
Two factors that affect exchange rates are: 1. Inflation rates: Higher inflation in a country relative to others leads to a depreciation of its currency. This is because higher inflation reduces the purchasing power of a currency. 2. Interest rates: Higher interest rates attract foreign investment, leading to an appreciation of the currency as investors need to buy the domestic currency to invest.