International Money and Capital Markets Research Paper

International Money and Capital Markets - Research Paper ExampleA developed providence is defined by high level of economic activities including foreign allot resulting to high demand of foreign currency, especially hard currencies such as US dollar. A higher demand of foreign currency induces increase in metamorphose value and the other way round (Taylor, 2001).Exchange rate shares an significant relationship to relative price level because price level establishes a link between foreign price and domestic price. Relative price digression or purchasing power parity is an important determinant of re-sentencing rate as it recognizes various adjustments that need to be made in the exchange rate for maintaining equilibrium in the international currency rates (Auboin and Ruta, 2013).Trade flow can be categorized as trade inflow (import) and trade outflow (export). When the cost of foreign currency is relatively high, countries focus on great export and less import while low exchan ge rate result in increasing level of import. However, frequent version in the exchange rate has negative impact on trade flow because of fluctuation in transaction and conversion costs (Auboin and Ruta, 2013).Interest rate is an influential factor with respect to fluctuation in exchange rate. Studies suggest that higher care rate result in appreciation in the currency value of a country with respect to that of other because, high interest rate attracts greater investment in the appreciating currency for earning better future returns (Taylor, 2001).Impact of economic factors on exchange rate equilibriumAssessment of exchange rate manner is a perennial subject of international monetary economics where various macroeconomic factors are examined to understand their role in maintaining equilibrium in exchange rate.