International Economics: Forex, Money Supply and Risk Analysis

This assignment delves into the core concepts of international economics, providing a detailed analysis of factors affecting foreign exchange (forex) rates and money supply. It examines the influence of inflation, current accounts, government trade, and recessions on currency values. The assignment also explores the foreign exchange risk, its impact on businesses, and the relationship between money supply, interest rates, and exchange rates. It further discusses the role of central banks in controlling money supply and the empirical relationships between money supply, exchange rates, interest rates, and real income. The analysis includes references to key economic theories and research, offering a comprehensive understanding of the interconnectedness of these economic variables and their implications in the global market.

Running head: INTERNATIONAL ECONOMICS
International Economics
Name of the Student
Name of the University
Authors Note
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................3
Reference List:...........................................................................................................................5

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Answer to question 1:
There are numerous factors that influence the forex prices. Anything that creates an
impact on the flow of money in a nation or between the countries might create an impact on
the currency value. Below stated are the factors that effects the foreign exchange markets are
as follows;
Inflation Rates: Modifications of the inflation rate in the market can lead to the change in
the currency exchange rates. A country having lower rate of inflation than the other country
will witness a rise in the value of its currency (Deventer et al., 2013). A nation with constant
lower rate of inflation presents a rising currency value whereas the nation with higher amount
of inflation would witness a fall in the currency and is escorted by the rising interest rates.
A nations current account or balance of payments: A nations current account
demonstrates the balance of trade and earnings on the foreign investment. This comprises of
the total amount of transactions together with the exports, imports, debts etc. If there is a
deficit noticed in the current account because of the spending of currency on importation of
products, then the earnings generated through sale of exports results in depreciation (Bodie,
2013). Therefore, the balance of payment fluctuates the exchange rate of a domestic nations.
Government trade: A nation having government debt is less probable to obtain foreign
capital that ultimately results in inflation. Overseas investors would dispose their bonds in the
open market given that the market predicts the government debt within the specific nation
(McMillan, 2013). As a result of this, a fall in the value of the exchange rate will come
following.
Recession: When a nation witness recession the rate of interest will fall it ultimately
decreases the chances of acquiring in the foreign market. As a result of this, the currency of

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the nation weakens in respect to that of the other country that ultimately lowers the exchange
rate.
The foreign exchange market is generally described as the world’s highly liquid fiscal
market. However, this does not signify that the currency is not subjected to varying liquidity
conditions that the traders of currency are required to bear in mind. From the perspective of
the individual trader, liquidity is generally experienced in respect of the volatility of the
movement in price (Mishkin, 2016). A market that is highly liquid would be witnessing more
movement in the prices abruptly with larger price increments.
The foreign exchange risk on the other hand, represents the financial risk of the
exchange rate of an investment change in value because of the changes in the currency
exchange rates. Foreign exchange risk generally creates an impact on the business that export
or import their products services or supplies (Friedman, 2017). Considering the relations of
risk in the foreign exchange market a firm faces the risk due to the economic exposure given
that the market value is impacted by the unanticipated volatility in the currency rate.
Fluctuations in the currency rate might influence the position of the company in comparison
to its value, competitors and its future cash flow.
Answer to question 2:
Money can be regarded as anything which is usually accepted as the medium of
exchange namely coins, cash, debit cards and cheques. It helps in underpinning every
country’s economy. Every country prints or mints its own currency of money. However, a
central bank implements the control on the supply of money in a nation (Mishra, 2015). The
supply of money can be defined as the entire amount of money that is held by the public
along with the transactional accounts balances, cash or the travellers cheques. A transaction
account is referred as the bank account which enables direct payment to the third party. For

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instance, an individual can make use of the cheque or debit card to make purchase of the local
farmer’s market. Cash on the other hand refers to the quantity of currency or coin in the
circulations beyond the territories of the bank account. Basically, it can be stated that the
money supply represents the amount of the money which is available with the nation during
any given period of time.
Interest rates on the other hand represents the amount of money which a person pays
in respect of the loan taken by them. Financial institutions profit when they give out the loan
for a certain sum of money and requires the lender to repay the sum of initial loan along with
the additional sum of money forming a specific percentage of the loan. Considering the
relation of interest rate on the supply of money it can be stated that the interest rate has the
direct impact on the quantity of money that is in circulations (Hung, & Thompson, 2016). If
the reserve bank increases and lowers the discount rate which in this case is the interest rate
that is charged by the banks for borrowing money would be to either limit or expand the
supply of money.
In respect of finance, an exchange rate can be defined as the rate at which one
currency can be exchanged for another currency. When the exchange rate is increasing, a
nation must sell its currency which ultimately increases the holdings of the international
reserves and the supply of money. It becomes necessary for the central bank to keep the
exchange rate fixed that ultimately creates an impact on the monetary base and hence the
supply of money (Selgin, 2015). The empirical findings from the comparison has confirmed
the presence of the long run equilibrium relationship between the money supply, exchange
rate and interest. In line with the comparison the findings from the relationships has
demonstrated that in the long run interest is positively related to the supply of money and the
exchange rate, whereas it is negatively associated to real income. The effect of money supply

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in proportion to the exchange rate is to lower the exchange rate, lessen the financial account
and reinforce the current account.

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Reference List:
Bodie, Z. (2013). Investments. McGraw-Hill.
Hung, H. F., & Thompson, D. (2016). Money Supply, Class Power, and Inflation:
Monetarism Reassessed. American Sociological Review, 81(3), 447-466.
McMillan, D. G. (2013). Risk and Return. J Bus & Fin Aff, 2, e130.
Selgin, G. (2015). Synthetic commodity money. Journal of Financial Stability, 17, 92-99.
Mishra, C. S. (2015). Risk and Return. In Getting Funded (pp. 193-218). Palgrave Macmillan
US.
Deventer, D., Imai, K., & Mesler, M. (2013). Advanced financial risk management.
Singapore: Wiley.
Mishkin, F. (2016). The economics of money, banking, and financial markets. Boston [etc.]:
Pearson.
Friedman, M. (2017). Quantity theory of money (pp. 1-31). Palgrave Macmillan UK.