Exchange Forme System: Factors Of An Exchange Rate System

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EXCHANGE RATE SYSTEM An exchange rate system is a system in which the national currency of one nation is linked by the national currency of another nation through an exchange rate. This exchange rate is usually a fixed ratio. The exchange rate has two components that is domestic currency and foreign currency. The domestic currency belongs to the nation and foreign currency belongs to the nation which it is comparing. In direct sense, usually the price of a unit of a foreign currency is expressed in the terms of the value of domestic currency whereas the price of a unit of domestic currency is expressed in terms of the foreign currency. An exchange rate which does not have a domestic currency as one of its components is known as cross exchange…show more content…
In case there is depreciation in the exchange rates then it will increase the cost of imports and decrease the cost of exports which will lead to increase in inflation. Factors that influence the exchange rates. 1. Government debt - Foreign investors get attracted to those countries which have less amount of debt rather than those countries with high debt. Mainly inflation is the reason for a country to debt to increase and it also decreases the value of currency. 2. Interest Rates - Sometimes when there are high interest rates, it acts like a benefit for the investors because they receive higher rate of return compared to other countries. In case the interest rates are low, the investors receive lower rate of return. 3. Government Interventions - The central bank of India also influences the exchange rates by selling and buying the domestic currency. 4. Inflation – In case there is depreciation in the exchange rates then it will increase the cost of imports and decrease the cost of exports which will lead to increase in inflationary situations. 5. Demand and supply - Another factor that influence the exchange rate is the demand and supply factors. For example inflation, interest rates, actions of the central bank…show more content…
Gold exchange Standards. 1. Gold Currency Standards- This standard is the first standard of the gold standard system. It actually started when the countries accepted gold as currency. So we can say that, these are like monetary units that we take into consideration which has the value of the circulating gold. But the remaining coins maybe of some other metal. The monetary value is considered on the circulating value of gold and the remaining coins will not have much value because it is of some other metal. More emphasis is given to the currency which has the monetary value rather than the coins or currency which lack the monetary value and it is considered as less valuable metals. 2. Gold Bullion Standards- Now this system is opposite compared to gold currency standards. In this there is no circulation of coins but only some amount of paper currency can be converted into gold. Gold are not permitted to be used as coins here. The paper currency notes are not valued according to gold. But some amount of paper currency could be converted to gold which is recognized by the government. It freely allows the exporting and importing of gold and the authority which is in charge of the monetary system of an economy focuses on the sale and purchase of gold at fixed price in exchange for circulating the

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