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How do changes in interest rates, inflation, productivity, and income affect exchange rates? What are the advantages and disadvantages of a weak versus a strong dollar for imports, exports, international and domestic markets? Exchange rates are the rates that a currency from one country trades for the currency of another ( olander, !"1"#. $hese rates can %e ad&usted %y a country purchasing and selling foreign currencies or other international reserves. hanges in interest rates, inflation, productivity, and income all affect the exchange rate. 'f a country has a higher inflation rate the demand for foreign goods %ecome cheaper, which increases foreign currency there%y creating a higher demand for foreign currency ( olander, !"1"#. ( country)s increase in interest rates also increases the demand for said country)s currency, which increases the value of this currency ( olander, !"1"#. When a country)s income reduces the demand for imports falls with it ( olander, !"1"#. $his in turn causes the country)s exchange rate to reduce from lack of demand. ( strong dollar increases the demand for exports and international markets. Higher valued exchange rates increase the amount of investors from foreign nations, which then increases the domestic markets ( olander, !"1"#. *eference olander, +. . (!"1"#. ,acroeconomics (-th ed.#. .oston, ,(/ ,c0raw1 Hill2'rwin. !. Who %enefits from a tariff or 3uota? Who loses? +o domestic markets %enefit from protectionist trade policies? How do protectionist trade policies affect a government)s wealth and fiscal policy? When a tariff is placed on a good it increases the price of the imported good there%y reducing the demand for the import ( olander, !"1"#. $his increases demand on domestic goods %y increasing the prices of foreign. 4uotas are similar to a tariff in that they limit the demand for imports ( olander, !"1"#. $he difference is the imports are limited %y 3uantity rather than a tax. $he affects of tariffs and 3uotas on the exporter of the goods is larger than that of the importer. $he exporter is essentially stifled in the amount of goods they can export there%y restricting the exporting country)s economy. $he intent %ehind tariffs and 3uotas is to increase the demand for domestic goods while decreasing that of foreign. $his can %uild the domestic economy %ut if it is not done carefully it can adversely affect exports which will create a lull in the domestic economy as well.
$ariffs create a much larger amount of revenue for the government than that of a 3uota. 5ince a 3uota is a limit on goods it does not generate revenue, however a tariff is a tax, which generates revenue. $his revenue makes a tariff a much more via%le option to the government than that of a 3uota.
*eference olander, +. . (!"1"#. ,acroeconomics (-th ed.#. .oston, ,(/ ,c0raw1 Hill2'rwin.