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Economics

Q. Determine the Exchange rate?

Exchange rate is determined by the ratio of domestic price level to the foreign price level. If, for instance domestic prices increase by 10% whereas foreign prices are constant, domestic currency will depreciate by 10% against foreign currency.

With this assumption, imports and exports may be assumed to be independent of the domestic price level. If domestic prices increase by 10% whereas the currency loose 10%, price of domestically produced goods abroad would be unchanged.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9577514

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