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Foreign Exchange Rate Determinants

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Identify the long-run determinants of exchange rates and the short-run determinants of exchange rates. In a free market, what determines exchange rates in the long-run and the short-run?

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This solution explains determinants of foreign exchange rates in short run and long run. The sources used are also included in the solution.

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The long-term determinants of exchange rates are actual relative price levels, trade barriers, exports of countries, imports, and productivity driving changes. For example, if the exports of a country increase, there is a greater demand for the country's currency and the value of the currency of that country increases. In the short run, it is the expectations of these same factors that determine exchange rates (a). These are expected price levels, expected ...

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