Macroeconomic Variables Affecting Exchange Rates for the US Dollar Essay

Macroeconomic Variables Affecting Exchange Rates for the US Dollar Essay

Length: 2259 words (6.5 double-spaced pages)

Rating: Powerful Essays

Open Document

Essay Preview

1. Introduction

Exchange rates are the price of a country’s currency in terms of another country’s currency. For example, the Japanese yen is pegged to the United States dollar which is known as the USD/JPY exchange rate. This in turn, means that exchange rates have two components, the domestic currency and a foreign currency, which can be quoted either directly or indirectly. A direct quotation is the price of a unit of foreign currency expressed in terms of a domestic currency, whereas, an indirect quotation is the price of 1 unit of domestic currency expressed in terms of a foreign currency. An exchange rate that does not possess the domestic currency as one of the two currency components is called a cross currency/cross rate which in turn is also known as a currency quotation, the foreign exchange rate or forex rate.

In the above diagram , an increase in demand for pound from the US shifts the demand curve to the right to D2 causing the pound to appreciate and the dollar to depreciate. An increase in the supply curve to the right meaning that there is an increase in the supply of pounds to the US market will cause a new equilibrium thus lowering the exchange rate; appreciating the dollar.

There are two parts to an exchange rate being the base currency and a counter currency. A direct quotation has the foreign currency is the base and the domestic currency is the counter whereas in an indirect quotation the domestic currency is the base and the foreign currency is the counter. Most exchange rates have the base currency as the United States dollar and other currencies as the counter currency; however, there are a few exclusions to this rule, as the euro and the Commonwealth currencies, for example, like the Britis...

... middle of paper ...

...e good in different nations. PPP is generally recognised to Cassell’s literatures in the 1920’s, however PPP origins can date back all the way to the 19th century British economist (David Ricardo 1821).

According to (Islam and Ahmed 1999) they identified that many researchers have conducted empirical tests to study the PPP relationship but the results have often been conflicting or different to one another. Furthermore, many of these studies have used unsuitable econometric methodologies and have used fairly short time periods to study what is tend to be known as a long-run relationship.

An extensive research has been carried out by (Taylor and Sarno, 1998), (Patel 1990) and (Dornbusch 1988) where all these papers studied the validity of PPP for the post-Bretton Woods floating exchange rates system and all failed to deliver sufficient evidence for long run PPP.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Essay about Macroeconomic Impact On Business Operations

- Macroeconomic Impact on Business Operations This paper will discuss the objective of monetary policy and its influence on the performance of the economy as it relates to such factors as inflation, economic output, and employment. Monetary policy affects all kinds of economic and financial decisions people make in this country, whether to get a loan to buy a new house or car or to start up a company, whether to expand a business and whether to put savings in a bank, in bonds, or in the stock market....   [tags: Economics Macroeconomics Business]

Free Essays
1832 words (5.2 pages)

Macroeconomic Objectives And Objectives Of Macroeconomics Objectives Essay

- ... Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald, 1999). First of all, a health economic growth and a low rate of inflation. If an economy grows too quickly due to an excessive increase in the demand of consumer, then there will be an increase in prices....   [tags: Inflation, Monetary policy, Macroeconomics]

Powerful Essays
1754 words (5 pages)

The Impact Of Macroeconomic Variables On The Telecommunication Industry Essay

- Introduction The intent of this paper is to perform an analysis of the cable industry's external environment. The first sections of the document will discuss environmental scanning and define the telecommunication niche that is currently occupied by cable operators such as Comcast. The next section will identify the macroeconomic variables that currently impact cable operators and will compare two variables to two corresponding industry variables. The final section of the paper will identify some of the challenges and opportunities facing the industry....   [tags: Economics]

Powerful Essays
1634 words (4.7 pages)

The Macroeconomic Environment Is A Dynamic Environment Essay

- Question 1 The macroeconomic environment is a dynamic environment, which could not remain unchanged (Gajewsky 2015). There are many factors influence the global macroeconomic environment, such as interest rate, exchange rate, GDP,aggregate demand, monetary policy and other macroeconomic variable (Oxelheim and Wihlborg 2008). These factors are closely associated with commodity price. For commodity price, the demand and supply are directly contributing to the price volatility. The changes in interest rates and exchange rates are significant influence for commodity output and it also has impact on the commodity prices (Dornbusch 1976)....   [tags: Inflation, Monetary policy, Macroeconomics]

Powerful Essays
1224 words (3.5 pages)

Impact of Macroeconomics on the Housing Industry Essay

- To better understand the real impact macroeconomics has in an economy or a particular industry, it is better to define what macroeconomics is and what it attempts to study. Contrary from microeconomics which studies the impact that individuals or companies have in a local economy, macroeconomics focuses on the behavior of the economy or industries as a whole, in a national or global perspective. (, 2015) However, microeconomics and macroeconomics are interdependent and complement each other....   [tags: Macroeconomics Essay]

Powerful Essays
612 words (1.7 pages)

Essay on The Effects Of Fiscal And Monetary Policy, And Macroeconomic Wealth

- ... Emerging empirical findings based on Keynesian assertions, include but are not limited to, the savings ratio does not change irrespective of large per capita income, and consumption is controlled primarily by permanent income as opposed to transitory income. From emerging findings based on Keynesian assertions came the LCH. The summary component of this article review will be shaped by conducting a comparison on the implications and results of the “stripped down” and amalgamated version of the LCH relative to Friedman’s Permanent Income Hypothesis as outlined within the article, followed by an assessment of the role of bequests in the model, and lastly policy implications on the LCH....   [tags: Macroeconomics, Keynesian economics]

Powerful Essays
1022 words (2.9 pages)

Essay about Variables Affecting Nursing Students’ Competency Scores

- Variables Affecting Nursing Students’ Competency Scores When an undergraduate nursing student goes in to take a competency test, their performance can be affected by multiple factors. The student could be influenced by how they chose to prepare for the exam, how they were feeling at the time of the test, or even their lifestyle (Cherry & Jacob, 2002). Anxiety that is displayed by a student while testing could be explained as a lack of understanding of the skill needed to be performed, but this may be a false accusation because of the anxiety the student is feeling (Pfeil, 2003)....   [tags: Nursing ]

Powerful Essays
1833 words (5.2 pages)

Essay about Macroeconomic Policies And Economic Growth

- ... Last but not least, is the balance of payments and the exchange rate and the primary goal of the government is to avoid deficits and excessive exchange rate fluctuations (as mentioned above). This principle is related to a country’s foreign trade and its economic relations with other countries. A country’s balance of payments records all the transactions between its residents that include transactions made by individuals, firms and government bodies and the rest of the world in a particular period....   [tags: Inflation, Macroeconomics, Economics]

Powerful Essays
1063 words (3 pages)

Macroeconomic Impact On Business Operations Essay

- In the following text, readers will form an understanding of what monetary policy is and the effect monetary policy has on macroeconomic facts such as gross discount products (GDP), unemployment, inflation, and interest rates. The text will also explain how money is created and give a combination of monetary policy that will best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment. Monetary policy is the process governments and central banks use to manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives....   [tags: Macroeconomics Monetary Policy]

Free Essays
1739 words (5 pages)

Essay on Macroeconomics

- Macroeconomics IS-LM Basics A) The IS curve slopes downward and to the right. B) The LM curve slopes upward and to the right. C) The slope of the LM curve depends on the interest sensitivity of money demand. An elastic money demand function caused the LM curve to be relatively flat. An inelastic money demand function caused the LM curve to be steep. D) The slope of the IS curve depends on the slope of the investment function. If investment is highly interest elastic, then the IS curve is relatively flat....   [tags: essays papers]

Free Essays
1552 words (4.4 pages)