Essay The Exchange Rate and International Trade

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I. INTRODUCTION

Objective

The general objectives of this study are to describe recent trade problems and examine why these problems are related to, and affected by exchange rates. The study first examines the exchange rate and how it is determined. The study will explore, in detail, the agencies that determine these rates. This study will also present the pros and cons of different prices of goods and services in different countries. Specifically, this paper:

(1) defines recent trade problems and how they are affected by the exchange rate; (2) describes the steps taken within the agencies that determine the exchange rates; (3) examines the impact of these rates, both good and bad; (4) analyzes the
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II. FOREIGN EXCHANGE RATE

Definition of the Exchange Rate

The foreign exchange rate is the price relationship between the currencies of two countries. How the exchange rate is determined, the agencies involved in determing the rate, and different exchange rate systems are outlined throughout this paper.

Determining the Exchange Rate

The exchange rate is determined by the supply and demand of services and goods traded between countries. Various agencies monitor the rate and intervene when needed, in order to counter disorderly market conditions. Intervention involves buying dollars and selling foreign currency, coming from the Exchange Stabilization Fund (ESF) of the
Treasury, to support the dollar’s price against another currency. Conversely, the Fed will sell dollars and buy foreign currency to increase the strength of the dollar. The United States Department of Treasury, the Federal Reserve, and central banks are the primary agencies that become involved if intervention is needed.1 Although the U.S Treasury has been assigned primary resonsiblity for international financial policy by Congress, the Treasury usually works alongside the Federal Reserve System when deciding to intervene. These interventions do not occur often. Rather, they are implemented as an attempt to shift supply and demand on a long-term basis.

Agencies Involved in Determining the Exchange Rate

The Federal

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