The price of a loaf of bread is
$1 in the United States, whereas it is 2 pounds in England. The prevailing
exchange rate between the dollar and the pound is $1 for 4 pounds. Is this a
sustainable exchange rate? If not, describe the changes that will bring the
exchange rate to equilibrium.
Yes this is a perfectly sustainable exchange rate.
Please remember exchange rate is not just defined by once good but a basket of goods and many other factors.
Exchange Rates are determined by the market forces of supply and demand. How much demand there is in relation to supply of a currency will determine that currency's value in relation to another currency. For example, if the demand for U.S. dollars by Europeans increases, the supply-demand relationship will cause an increase in price of the U.S. dollar in relation to the euro. There are countless geopolitical and economic announcements that affect the exchange rates between two countries, but a few of the most popular include: interest rate decisions, unemployment rates, inflation reports, GDP numbers and manufacturing information.
May 4th, 2015
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