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Discuss the factors which determine freely floating exchange rates. Discuss the view that an appreciation of the currency is always beneficial and depreciation always harmful.

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Introduction

a) Discuss the factors which determine freely floating exchange rates. b) Discuss the view that an appreciation of the currency is always beneficial and depreciation always harmful. A freely floating Exchange Rate is an exchange rate with no government or central bank action to keep it stable, this means that the determination of the exchange rate is left to market forces. On one hand, the appreciation of the currency is when the exchange rate is subject to an increase meaning that the currency of the country buys more of all other foreign currencies. On the other hand, a depreciation of the currency leads to a fall in the exchange rate therefore the currency of the domestic country buys less than all other foreign currencies. Two parts will be attributed to this essay, the first being the discussion of the factors that determine freely floating exchange rates, then the discussion of whereas an appreciation of the currency is always beneficial or not and whereas a depreciation is always harmful or not. ...read more.

Middle

so that they can profit from it. Nevertheless, this profit will only be in the short-run because in the long-run, the price will stabilize because the price of coffee in the U.S. will decrease and the price of coffee in Japan increase therefore this will lead to an equilibrium of prices where the price of coffee in Japan will be the same than the one in the U.S.. If the currency appreciates, it is true that the value of the currency will increase giving the country a more powerful exchange rate. For an appreciation to happen the demand of the currency has to increase and the imports decrease. By looking first at inflation with an appreciation of the currency it can be noted that inflation will decrease because the country's exports will become more competitive if the currency is appreciating and therefore the imports will be less competitive leaving us with a rise in demand and a fall in supply of the currency. ...read more.

Conclusion

Because of this depreciation, it can also be seen that the inflation domestically will be higher than abroad leading to a fall in demand for the currency thus the imports will be cheaper to buy than domestic produced goods therefore the supply for the currency will rise leading to a perfect example of inflation. Another disadvantage of this depreciation of the currency is that if the prospects for investment are better abroad, a domestic citizen will invest abroad leading to a fall in demand and a rise in supply of the currency. In conclusion, it can be said that the freely floating exchange rate has more advantages than disadvantages which make it a good theory to adapt in real life whereas in the other we have confirmed that an appreciation has only positive aspects which can benefit the currency and a depreciation in the currency is very harmful for a country's currency because of its negative aspects. Friday 29th November 12th Grade Economics Homework IB Economics ...read more.

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