DQ Shortrun pressures on market exchange rates result mainly

DQ: Short-run pressures on market exchange rates result mainly from gradual changes in flows of international trade in goods and services. Do you agree or disagree? Why?

Solution

Exchange rate is the value of one currency in terms of another . Now in the market for foreign currency , the demand and supply of foreign currency fluctuates in the short run mainly due change in trade pattern . Suppose US starts to demand more imports from Mexico so US would require more Mexican currency to buy goods from Mexico . Hence in this case demand for Mexican currency rises . As demand rises , the price of Mexican currency becomes high . Here by price of Mexican currency we mean amount of dollars required to buy a single unit of Mexican currency . So now we require more dollars to buy an unit of Mexican currency . Exchange rate has appreciated for Mexico .

Hence , we can see that short run pressures on market exchange rates are the result of changes in trade pattern or flows of international goods and services .