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Exchange Rate In Russia Essay

770 words - 4 pages

1. Assume that substantial capital flows occur between the United States, Country A, and Country B, in all directions. If interest rates in Country A decline, how could this affect the value of Currency A against the dollar? How might this decline in Country A’s interest rates possibly affect the value of Currency B against the dollar?
Interest rates, inflation, and exchange rates are highly correlated; interest rates have been used by Central banks to exert influence over exchange rate and inflation as a fiscal policy, high interest rates attract foreign capital and tries to rise the exchange rate, on the other hand this impact could be mitigated by the high inflation differential between ...view middle of the document...

In addition, Russia’s inflation rate was high. Explain the type of pressure that these factors placed on the Russian currency.
Russia high inflation rate and negative balance of payment or trade deficit pressured the currency to depreciate:
Inflation differential between Russia and other countries was totally related with the pressure on its exchange rate, the higher the inflation the lower the purchasing power relative to other countries, moreover, inflation causes currency weakness because it diminishes the investment real return. In addition, inflation will depreciate the currency as there will be less demand for that country's exports and this will depreciate the currency.
The reason why inflation increases the exchange rate is based by the theory of purchasing power parity (PPP), This theory states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent (Moffat, 2014). If the same good is not worth the same in two countries, it would be a risk free profit to buy in the cheaper country and sell it in the most expensive country. Then, when Russia had a higher inflation than other countries, the same good cost more in terms of Russian currency...

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