1. Explain how trade balance, interest rates, and exchange rates are related, an
ID: 2633421 • Letter: 1
Question
1. Explain how trade balance, interest rates, and exchange rates are related, and cite an example of how a rise or fall in one changes the others.
2. Does a deficit in China or the US change the overall adavantage or disadvantage of trade? Why?
3. Explore how the cost and quatity of imports and exports, such as electronic equipment, may be challenged by the rise and fall of these rates.
4. Incorporate the fluctuations of supply and demand into the costs incurred and decide ways management calculates estimation for further product needs.
5. Explain the philosophy of "international crowding out" citing an example of how this may occur, and describe how this may occur, and describe how excessive borrowing in one county has affected interest rates in the US.
Explanation / Answer
1. Explain how trade balance, interest rates, and exchange rates are related, and cite an example of how a rise or fall in one changes the others.
Some countries simply allow the exchange rate to be determined by demand and supply. Some countries attempt to keep the exchange rate between their currency and another currency constant. When countries agree to keep the value of their currencies constant, there is a fixed exchange and is called exchange rate system. Exchange rate or value of a currency is defined by its supply and demand factors. If a country has high interest rate, that will attract more investors to buy that currency to invest (increase in demand for the currency). If inflation is high, the value of the currency decreases over time and therefore not attractive to hold (decrease in demand). If the country has high productivity and does a lot of exports, foreigners will need to buy currency in order buy the goods (increase in demand).
2. Does a dificit in China or the US change the overall adavantage or disadvantage of trade? Why
China
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