Sample Term Paper

The currency that has a floating exchange rate basically allows the natural forces of the market and the micro level transactions by traders and speculators and so on in the currencies to determine the exchange rate of the currency. This means that the value is alternating with these transactions and is not fixed in relation to any other currency with supply and demand dictating which direction it follows. The advantage of this is that is may act as an automatic stabilizer for balance of payments as depreciation may lower imports and increase exports whereas appreciation may have the opposite impact. The danger in this case is the risk to businesses with constant volatility in the exchange rate of currencies which may impact international transactions.

International Fisher Effect

This is basically a hypothesis with relation to international transaction that states that real interest rate of a country does not depend overridingly on its monetary variables. A nation with lower nominal rate of interest should also carry a lower rate of inflation which would lead to gradual appreciation in real currency exchange rate over time. This translates into the variation in nominal rates of interest between two economies being the determining factor of nominal rates of interest between them as told by the international fisher effect.

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