Foreign Exchange Market and Exchange Rate Determination

1. Exchange rates are like prices, in that they are determined by supply and demand. But not all exchange rates are allowed to float freely, since the governments or central banks of some countries actively intervene in the market for their currency to manipulate its value. Identify one policy a government or central bank could use to strengthen the value of its currency and one policy that could weaken the value of a currency.

• Governments could use fiscal policy to lower the taxes in a country, leaving people with more money in their pockets to spend. Therefore spending on imports would rise as well, causing an increase in supply- leading to a decrease in the value of the currency

• To strengthen the value of a currency, governments could use monetary policy in order to increase interest rates. This increases foreign investors wanting to invest into your country, leading to more demand- which leads to strengthening of the currency.

2. What are the benefits of having a stronger currency?

Having a currency that has a higher value than another currency means you can buy they currency cheaper. Therefore also meaning that the other country's export goods are cheaper for you to buy.


3. What are the benefits of having a weaker currency?
When having a weaker currency in comparison to a stronger one, the people in the country with the stronger currency will will want to buy more of your exports as they would be cheaper for them to buy.

4. Which determinant of exchange rates presented in the video do you think are most attributable to the fluctuating values of currencies on foreign exchange markets, and why? Relative incomes, relative interest rates, relative inflation rates, speculation or simply the tastes and preferences of global consumers?

I think the determinant of exchange rates most attributable to the fluctuating values of currencies on foreign exchange markets is relative interest rates. As a country's interest rates rise, more people/companies from foreign countries will want to invest into your country- in order to earn more money back. And as interest rates are constantly managed, and in today's internet based world, investments are quick to make causing constant differences in the flow of money from one countries to other. As well as these investment amount are often very big and therefore affecting the exchange rate greatly.

EURO (€) VS. NORWEGIAN KRONER (NOK) 

List and explain the factors that might lead to a fall in the supply of the selected currency in relation to the Euro market.

Norway might be experiencing high rates of inflation, therefore their products would seem more expensive for European countries resulting in less demand for Norwegian products leading to a decrease in the supply of euros in Norway,

Norway might have lowered their interest rates, therefore foreign European countries will lack an interest to invest in Norway, leading to a decrease in supply of euros. 

Another explanation could be a decrease in income for some European countries, therefore decreasing demand for foreign goods such as goods from Norway.

Or maybe European consumers have just changed their tastes and preferences away from Norwegian goods.