The very initial concern is what is the exchange rate policy? Exchange rate policy is the way in which countries manage their currency in comparison to foreign currencies and foreign exchange market as well. It is basically the rate at which the domestic currency can be converted in the other foreign currency. The definition gives us a clear understanding that exchange rate policies are crucial to the economy and it has obvious impacts on both the local and international economy.
Exchange rate policies impact countries in the following ways:
- There are important macroeconomic impacts of exchange rate policies on the economy of a country. The aggregate demand either rises or declines due to changes in these policies. Impact on prices of imports and exports is an example.
- The type of monetary policy goes along with the exchange rate policies. Rise and fall of the exchange rate determine the trading ability of a country.
- Additionally, the prices of imports and exports influenced by exchange rates also influence the volumes of goods and services that are imported and exported between countries.
- To enhance the number of exports, the exchange rate would be kept down and to reduce the pressure of inflation rates would be kept up.