What Determines the Value of Money?
Money is nothing more than a piece of paper or a metal coin until someone, or something, attaches value to it. Because most regard value as a "fair trade" arrangement brought about according to the laws of supply and demand, the conditions that affect the laws of supply and demand are what determine the value of money.
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General Economic Health
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An economy displaying positive indicators regarding growth, inflation, and debt load will see increased investment in its economy, greater demand for its currency, and an increase in its exchange rates. Alternatively, economies showing little or no growth will see the value of its money decline.
Foreign Trade
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Strong demand for a country's goods will increase the value of its money as long as imports outweigh exports.
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Government Intervention
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Governments that attempt to finance debt by printing more money leads to an increase in money supply. This can lead to a decrease in the value of money if a decrease in demand occurs.
Market Speculation
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The value of money can fluctuate according to how investors perceive the market will move. In addition, currency markets react quickly to changes in market news, and this determining factor can cause fluctuations on a daily basis.
Exchange Rates
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An exchange rate is how money in one country compares to money in another country. In general, the higher the exchange rate, the less value the money has. For example, if it cost 2.54 pounds to buy one U.S. dollar, the pound has less value than the dollar. Exchange rates display as a ratio, such as 2.54-to-1.
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