Economics Exchange Rate Systems Questions
Exchange rates can have a significant impact on foreign direct investment (FDI). When a country's currency depreciates, meaning it becomes weaker compared to other currencies, it can make the country's goods and services more affordable for foreign investors. This can lead to an increase in FDI as foreign investors are attracted to the lower costs and potential for higher returns. On the other hand, if a country's currency appreciates, becoming stronger, it can make the country's goods and services more expensive for foreign investors. This can discourage FDI as it reduces the potential profitability of investments. Therefore, exchange rates play a crucial role in influencing the level of FDI in a country.