Research Paper on:
Exchange Rate Theories

Unformatted Sample Text from the Research Paper:
to the consumers in each country. In the past many countries have benefited from exchange rates that have been fixed wither to each other or to gold. The increased free  market practices and floating currency rates, which have increased the volatility of many currencies and therefore the impacts they have on national economies and consumer prices. The increase importance  of exchange rates and understanding them has lead to a plethora of different exchange rate theories. The best known is that of the Purchasing Power Parity (PPP). This is also  sometimes referred to as the inflation theory of exchange rates, and has its basis in the sixteenth century Spanish Salamanca school added to with the work of Gerrard de Malynes  and later of Keynes, who attributed the model as we see it today to David Ricardo in theory and named by Gustav Cassel (Keynes, 1971). This theory is based  on the law of one price, or the no arbitrage argument (Keynes, 1971). In very simple terms this model looks to the supply and demand for currency as it is  flow theory. The idea is that currency will be demanded by a country where there is the need to pay for goods that are imported, the more goods are  imported the more of that countrys currency will be demanded. Where there is a demand that is growing and that exceed supply the price would increase. There is little  that can be disagreed with here. This then goes further and looks at the role of interest rates and inflation. If there are two countries, such as Country 1 and  Country 2, they are each exporting good to each other. They both have their own currency, and at the beginning of the year 1 unit of country 1s currency is