what are the factors that affect the value of currency in what way i.e.change in the factor affecting the value either positively or negatively....

Answer
HERE IT IS:
Foreign Exchange being a commodity like any other commodities tends to fluctuate in price from time to time. There are various factors that cause the fluctuation in the rates of exchange;

* Rising interest rates cause 'hot' money to flow into the economy, therefore the demand of the domestic currency increases, and thus the currency appreciates in value and demand.

* Relative inflation rates, affect the economy's international competitiveness, so if the economy is experiencing higher inflation rate than its trading partners, its purchasing power is eroded and thus the demand for that particular currency.

* Speculation normally affects the currency value when there is belief that a particular economy is 'over heating' and that soon there will be devaluation, then chances are high that, speculators will pull out their monies, causing there to be more supply than demand on the Forex for that particular currency, hence its depreciation.

* International trade affects the value of a currency, particularly through how much export or imports a nation may have, countries selling so many goods and services to others, tend to appreciate their Forex standards and those importing highly normally have their currency fall in value since they are spending more to their trading partners than they gain from them.

* Political and psychological factors are believed to have an influence on exchange rates. Many currencies have a tradition of behaving in a particular way for e.g. Swiss franc as a refuge currency. The US Dollar is also considered a safer haven currency whenever there is a political crisis anywhere in the world.

* Governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.

ANSWER

What are the three tools of monetary policy? Which tool is most often used?

Answer
Dear Mr Royalty,

Thank you for your question, allow me to explain. The three tools of monetary policy are minting(via the FOREX market), shrinkage (via the Bond market) and literal expansion (via interest rates). All of these tools have a variety of direct and indirect affects on a nationâs economy. However, due to time and space restraints I will only briefly summarise the central ideas.

Minting, also known as the imperial strategy, is the process of reissuing and refining the broad money flow. Derived from a technique commonly used during the Prussian Empire, of confiscating colonial capital reserves, melting them down and using them create munitions, which had a higher value than the original currency. This was utilised in a particularly aggressive manner in the Kendal region of Europe. The modernised form of method focuses on the manipulation of the foreign exchange reserves in order to expand the extra capital. This acts to lower the wealth of foreign nations, whilst increasing domestic output. The excess capital âtrickles downâ through the corporate and institutional hierarchy and solidifies in the lowest quartile. Some economists have poked holes in this technique due to the detrimental impact on other economies. However many policymakers usually justify their protectionist action under a tic-for-tac guise.

Shrinkage, a tool devised by Austrian economist Wayne Szalinski in 1989, helps to alleviate the problems associated with an overheating economy. The neo-Keynesian concept involves substantial government injections of cash inflows, via the Bond market, it has been employed by the British since 2 007 recession. Prime Minister Silvio Berlusconi also uses this in order to control the Italian job market; however the results have been widely criticised. This overspending acts to âcrowd outâ real consumer spending and decrease aggregate demand. The exact easing of inflationary pressures is usually calculated by what the Wall Street Journal refers to as a âShrinkage Matrixâ.

Finally literal expansion is the process of increasing consumer demand via interest rate manipulations. This tool hinges on popular expectation of interest rates. If, for instance, most people have great expectations of high interest rates and these are not delivered then they will spend more, rather than save. The trial period for this technique was in France between on the 17th of July 1984 and the 29th of July. The outcome was highly positive and the French Chancellor, Alexander Dumas, was highly praised. However on the twelfth night of the monetary experiment concerns were raised about the medium sustainability of this technique without incurring inflation.

I hope this helps with your essay.

Professor E. Concur, New College of Humanities, UK