1) What is Exchange Rate?

An exchange rate is a rate at which one currency will be exchanged for another currency and affects
trade and the movement of money between countries.

2) Give three examples of actual exchange rates that currently exist between Caribbean
currencies and the U.S. dollar.

A) Cuba= 24.00 CUP=1.00 USD

B) Cayman Islands= 1.00 KYD=1.20 USD
C) Jamaica= 1.00 JMD= 1:50 USD

3) Explain any three (3) factors that affect exchange rates.

A) Inflation-When inflation is high, the value of a country’s currency weakens. This is

because goods become more expensive, and it becomes less attractive for investors to
do business. The inverse is also true. When there’s significant lowering of inflation, there
tends to be more flow of money in a country, the buying power of the currency becomes
more valuable, and the exchange rate strengthens.

B) Terms of Trade-

C) Interest Rates- interest rate is best fed as the amp a lender charges a borrower. As a
general rule, the higher the interest rate, the more valuable a country’s currency is likely
to be. This appreciation in the exchange rate is caused by a growth in demand for that
particular currency, as higher interest rates will attract more foreign investment.
Therefore, the value of a country’s currency will increase.

4) Distinguish between fixed exchange rate and a flexible/floating exchange rate.

A) Fixed exchange rates mean that two currencies will always be exchanged at the same price
while floating exchange rates mean that the prices between each currency can change
depending on market factors; primarily supply and demand.
References

Chen, J. (2022). Exchange rates: what they are, how they work, why they fluctuate. Investopedia.
https://www.investopedia.com/terms/e/exchangerate.asp

Heron, T. (2023, January 17). How do interest rates and inflation affect forex? IG.
https://www.ig.com/en/trading-strategies/how-do-interest-rates-and-inflation-affect-forex-
230117.amp

WorldRemit Content Team. (2023). How do interest rates affect exchange rates? - WorldRemit. Blog |
WorldRemit. https://www.worldremit.com/en/blog/finance/how-do-interest-rates-affect-exchange-
rates/#:~:text=A%20country's%20currency%20will%20rise,rates%20and%20a%20strong
%20currency.

Team, I. (2022). Floating Rate vs. Fixed Rate: What's the Difference? Investopedia.
https://www.investopedia.com/trading/floating-rate-vs-fixed-rate/