The Exchange Rate Within The Global Market

772 Words Dec 9th, 2015 4 Pages
Like stated previously, each factor has its own respected relationship to the exchange rate within the global market. But a large influence is in part to how much a currency is worth is correlated to how much value that currency is backed by the local government. Physical cash has to be supported by goods and/or gold for the currency to be worth anything. This value comes from a balance with in accounts and controlled government spending. The current account is the balance of trade between a country and the trading market, based off of all payments between other countries for goods and services. Any deficit in the current account shows if there is more being spent on imports products than being earned by exporting its own goods. These deficits in turn force countries to borrow capital from foreign sources to make up for this difference to keep the balance. “This excess demand for foreign currency lowers the country 's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.” (Van Bergen)
In the worst case scenario, a government may decide to print money to pay back part of a large debt. Again, increasing the money supply will eventually cause inflation to rise, making it more difficult to pay off those debts as time goes on. In addition, if a government is not able to service its deficit by selling bonds to make up the difference, then it must increase the supply of…
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