Paper Example on Factors That Influence Foreign Exchange Rates

Question 1

The foreign exchange rate is the price at which domestic currency is stated in terms of foreign currency. Primarily, the foreign exchange rate compares a local currency with another foreign currency in order to show their relative values. For instance, on 3rd October 1 US dollar was equivalent to 0.91 Euro. Some of the factors affecting foreign exchanges include the following:

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• Inflation rates: the changes in the inflation rate can cause a change in currency exchange rates. A country that has a low inflation rate experiences rising currency value.
• Interest rates: increase in interest rate primarily results in currency to appreciate as the higher interest rate means that there will be a higher rate to lenders and the currency will attract more foreign capital leasing to increased exchange rates.
• Country's current account: a deficit in the nation's current account because of more spending of its domestic spending on imports than its exports leads to depreciation.
• Government Debt: primarily, a nation with debt has a less likelihood of acquiring foreign capital resulting in inflation. In this case, foreign investors will sell their bonds in the open market. Resultantly, this leads to a decrease in the value of the exchange rate.
• Terms of trade: terms of trade refer to the ratio of imports to exports. A state with improved terms of trades means that its export prices will increase, resulting in a higher rate than that of the import. This leads to higher revenues leading to higher demand of the country currency in return increasing its value.
• Political stability and performance: a nation's economic performance and political state affect the strength of its currency.

Question 2

Education

Education is essential in each nation in making sure that the student will become productive citizens of the country. Therefore, the expenses that are made by the government on education should be cut only on extra activities to some extent. Moreover, the funding for private institutions can be reduced, but the funding to public schools should not be affected.

Salaries for the officials

Importantly, the basic salaries for the officials can not be reduced as this will not motivate them t work to their level best. However, some of the allowances such as travel allowances, expenses in recreations and refreshments can be reduced to make sure that the government has adequate money to spend on essential things that can result in export earnings being able to pay for the imports.

Food Subsidies

Food subsidies should not be cut as they make the basic needs of the people. Primarily, thee subsidies should remain because is they are reducing this might aggravate the society and result in starvation. A government should do anything possible to make sure its people are feed and reducing the food subsidies will be going against this principle.

Tax Rebates on Exports

The tax rebates that are imposed on the exports should not be reduced in any way. This is because it motivates exporters to increase their exports. Moreover, the exports are helping in foreign currencies in the nation. Therefore, the tax rebates on the exports should not be reduced as t helps in gaining foreign currencies.