Macroeconomics
Forexample,AmericantouristsvisitingJapanwillneedtobuyyenwiththeU.S.dollarstheyhaveinhand. If the exchange rate ofdollartoyenis$1=146JPYandthetouristswanttobuyashirtfor4,000JPY, they will need to exchange around $27.39 for 4,000 JPY ( ). 41, 04060 Foreign Exchange Market Currencies, like any other good or service, are actively traded in a market referred to as the foreign exchangemarket (Forex).Inanyexchange,includingcurrencytransactions,apriceisestablished.Inthe foreignexchangemarket,thepriceofacurrencyisdenotedintermsofothercurrencies,representedas an exchange rate. Exchange rates are typically determined by the forces of supply and demand in a country's foreign exchange market. There are two main exchange rate systems: 1. Floating Exchange RateSystem: Theexchangeratebetweentwocurrenciesfluctuatesbased onmarketforces,supply,anddemand.Governmentsorcentralbanksdonotintervenetofxthe rate. MajorcurrenciesliketheU.S.dollar,theEuro,andtheJapaneseyenarefloatingcurrencies that change value based on Forex market movements.
2. FixedExchangeRateSystem: Inthissystem,the government or central bank sets a specifc exchange rate and intervenes in the foreign exchangemarkettomaintainthatrate.Fixedrates can be linked to a country's gold reserves or another stable currency. Many emerging and developing economies use fxed exchange rates for their currencies to ensure economic stability. Examples include Panama, Hong Kong, Saudi Arabia, and the United Arab Emirates that peg their currencies to the U.S. dollar.
Exchangeratesplayapivotalroleininternationaltradeandfnance,influencingthecostofimportsand exports, tourism, foreign investment, and even inflation rates within acountry.Infxedexchangerate systems, centralbanksandgovernmentsofteninterveneintheforeignexchangemarkettostabilizeor influence their currency's value. The fluctuations in exchange rates can have signifcant economic consequences, closely monitored by governments, businesses, and investors worldwide. Currency Appreciation and Depreciation When an exchange rate changes, the value of one currency increases while the value of the other decreases. In a floating exchange rate system, the value of a currency is determined by the price mechanism,undertheforcesofdemandandsupply.Thismeansthatanychangeinthedemandand/or supply of a currency will affect its value.
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