Fundamentals of Economics
Exchange rates are the rates at which one currency can be exchanged for another. For example, you can exchange one US dollar for a certain number of euros, yen, or pounds. Exchange rates are important because they affect the value of international trade and investment.
There are different types of exchange rates that can be used to measure the value of one currency against another:
Exchange rates can be fixed or floating. A fixed exchange rate is when a government or central bank sets the exchange rate, while a floating exchange rate is determined by supply and demand in the foreign exchange market.
Exchange rates can be affected by a number of factors, including:
For example, if a country has a higher inflation rate than another country, its currency will usually depreciate in value relative to the other country's currency. Similarly, if a country has a higher interest rate than another country, its currency will usually appreciate in value relative to the other country's currency. Political instability and economic growth can also affect exchange rates.
To illustrate the impact of exchange rates, let's consider an example. Suppose that the exchange rate between the US dollar and the euro is 1 USD = 0.85 EUR. This means that you can exchange one US dollar for 0.85 euros. If you have 100 US dollars, you can exchange them for 85 euros. Now suppose that the exchange rate changes to 1 USD = 0.80 EUR. This means that the euro has appreciated in value relative to the US dollar. If you still have 100 US dollars, you can now only exchange them for 80 euros. This means that your purchasing power in the Eurozone has decreased.
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