impact of fiscal and monetary policy on exchange rates

FACULTY OF BUSINESS MANAGEMENT
BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE
INTERNATIONAL FINANCIAL (FIN542)
TITLE:
INDIVIDUAL ASSINGMENT:
THE EFFECTS OF FISCAL AND MONETARY POLICIES ON THE EXCHANGE RATE
CLASS: BA2423D
PREPARED BY:
NO. NAME STUDENT NO.
4. NUR SYAHIRAH BINTI KHEIRUDDIN 2021110569
PREPARED FOR:
NUR AZWANI BINTI MOHAMAD AZMIN
SUBMISSION DATE:
11 DECEMBER 2021
THE EFFECTS OF FISCAL AND MONETARY POLICIES ON THE EXCHANGE RATE
What is fiscal policy and monetary policy? Is it possible for policies to influence the
exchange rate?A fiscal policy can be means as activities liked spending and taxationthat

taken by a government to control their economy in order to achieve growth and reduce
poverty.[ CITATION Bri21 \l 1033 ]Policy makers usually use fiscal policy and monetary
policies as instruments to actively stabilize the economy of their country. An exchange rate
impacts how inexpensive or expensive things, such as televisions, clothing, and automobile
tyres, are for you to purchase. A high exchange rate can reduce the cost of foreign currency
by lowering the cost of imports. When the exchange rate is low, you cannot buy as much
foreign currency.
Exports of currency commodities to other countries raise the cost of exports while
increasing the appeal of imports, resulting in a rise in demand for currency to acquire those
imported goods. As a result, the exchange rate rises, resulting in higher prices for goods in
the future.When the exchange rate is low, imports are more expensive since your currency
can't buy as much foreign currency. Although this means you'll spend more of your income
on necessities, it also encourages exports, which can help the economy grow by creating a
trade surplus.
The exchange rate can be influenced by fiscal policy in three ways. Firstly, when the
government cuts taxes on goods and services, citizens earn more money and have more
freedom to import anything they want. The increase in imports causes more currency to be
sold in order to obtain foreign currency to pay for the imported goods and services. As a
result, the exchange ratewill be lower because of the goods prices in the future are
increasing. Second, the changes in price can result in our exports to foreign countries
becoming more highestbecause of the price of goods and servicesincrease, while imports
become more attractive. It is because foreign currency is in higher demand to buy products
or services, whereas domestic currency is in lower demand to buy products or services. The
exchange rate is lowered as a result of this.
Lastly, if the government wishes to increase spending, it must first find a way to fund
it. To make this goal achievable, the government needs to sell bonds and raise funds from
that. From the sold bonds, it can raise the interest rate. The higher of interest rate can
causes the foreign currency to flow into our country. It is because foreign investors are
attracted to the higher interest rates. People are attracted to higher interest rates because
they feel it gives them a better return on their money. As result of this our exchange rate is
low.
A Canadian economist, Robert Mundell, makes the argument that both fiscal and
monetary policies' efficacy in a small open economy is quite precise. He further contends
that although monetary policies can only function in a floating exchange rate market, fiscal