Exchange rate

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The exchange rate, or foreign-exchange rate is the price at which one country's currency is exchanged for the currency of another country.

The exchange rate helps determine how much is paid for imported goods and services and how much we receive for is exported.

When the value of a currency falls, imported goods become more expensive, and it tends to reduce the volume of imports. At the same time, other countries will pay less for some products of that country and that will tend to boost export sales.

If interest rates are higher in one country than in other countries, investors may choose to invest in that country which increases the demand for that currency. If inflation rates are higher, investors are less likely to prefer that currency—even with higher interest rates—because of the value of that currency will be eroded by inflation.

Sources

http://usinfo.state.gov/products/pubs/oecon/chap12.htm

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