SHRADDHA SHARMA M.A. ECONOMICS FINAL YEAR (3rd SEMESTER) Vasanta College for Women, Affiliated to Banaras Hindu University Exchange rate  The price at which one currency is converted into or exchange for another currency  Decided by the government – what type of exchange rate is to be used?  Exchange rate existing between two countries can be expressed as – a. A ratio of one unit of foreign currency to a certain number of units of the home currency b. A ratio of certain number of units of the foreign currency to one unit of the home currency. Types of exchange rate 1. 2. 3. 4. 5. Real exchange rate Floating exchange rate Fixed exchange rate Managed exchange rate Nominal exchange rate, etc. Factors affecting the change of exchange rate  Balance of payment  Interest rate  Inflation  Fiscal and monetary policies of a country  Economic strength of a country  Government intervention in the market  Venture capital or speculation regarding appreciation or depreciation of a currency. Real Exchange Rate  Real exchange rate is the nominal rate adjusted for differences in price level  It basically talks about the purchasing power of a currency as it is that rate that we have after it is adjusted as per the level of inflation  It can be expressed as – er = en (P / P*), where – er is the real exchange rate; en is the nominal rate; P is the price level of home country; and P* is the price level of the foreign country. Fixed Exch ...
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