DQI Microeconomics: Impact of Currency Fluctuations. Essay Example.

2021-07-05 11:01:10
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Carnegie Mellon University
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According to Schulmeister (2013), microeconomics can be defined as the study of individual behavior and businesses and how the decisions are made depending on the allocation of limited resources. It examines how these behaviors and decisions affect the supply and demand of goods and services, hence determining the prices people will pay for them.

Currency fluctuations are a norm in todays markets, and several factors control the market value of a given currency including GDP, trading, inflation, interest rates and the effects of the foreign and local investments (He, Fayman & Casey, 2014). Currency appreciation and depreciation have different impacts on the economy. Some of the benefits of devaluation include cheaper exports that boost domestic demand and job creation in the export sector. The other benefit is the improvement of current account deficit due to increased exports, and lastly, it leads to higher economic growth due to higher exports and aggregate demands. The beneficiaries of depreciating dollar include exporting companies because the goods become cheaper and more competitive (Bystrom, 2014). The tourists will also benefit from depreciating currency as they will find goods and services cheaper in Canada.However, depreciating currency is known to have disadvantages including the economic crisis; hence I recommend that before one to consider investing overseas especially when the currency is depreciating because the appreciating foreign currency would boost the returns.

Appreciating currency has several impacts on the economy including expensive exports hence fall in quantity, cheaper imports hence increased the quantity of imports, lower export demand, thus increasing spending on imports, causing fall in aggregate demand, hence lower economic growth and reduced inflation rates (Bystrom, 2014). Importing companies will benefit from appreciated currency because they will import goods at a cheaper price. The status of the dollar is bolstered in the world currency reserve (Schulmeister, 2013). The tourists travelling abroad to Europe will benefit as they will have a higher purchasing power abroad. The foreign companies in Canada will benefit considering that it will earn income in dollars that translate to gains in balance sheets. I would recommend while the currency is strong, monetary policies should be formulated hence attracting FPI investors who seek higher and quick returns (Bystrom, 2014).

Reference

Bystrom, H. (2014). The Impact of Currency Movements on Asset Value Correlations. Journal of International Financial Markets, Institutions, and Money, 31, 178-186.

He, L. T., Fayman, A., & Casey, K. M. (2014). Bank Profitability: The Impact of Foreign Currency Fluctuations. The Journal of Applied Business and Economics, 16(2), 98.

Schulmeister, S. (2013). Currency Speculation and Dollar Fluctuations. PSL Quarterly Review, 41(167).

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