Economics Exchange Rate Systems Questions
The impact of exchange rate changes on foreign reserves can vary depending on the specific circumstances. In general, a depreciation of the domestic currency can lead to an increase in foreign reserves, as it makes exports more competitive and encourages foreign investment. This is because a weaker currency makes domestic goods and services cheaper for foreign buyers, leading to an increase in exports and foreign currency inflows. On the other hand, an appreciation of the domestic currency can lead to a decrease in foreign reserves, as it makes exports more expensive and can discourage foreign investment. This is because a stronger currency makes domestic goods and services more expensive for foreign buyers, leading to a decrease in exports and foreign currency inflows. However, it is important to note that the impact of exchange rate changes on foreign reserves can also be influenced by other factors such as government policies, capital flows, and trade balances.