Exchange Rates and Open Economy Macroeconomics

Exchange rates determine how much one currency is worth compared to another. In an open economy, where countries trade freely, these rates influence imports and exports. For example, if the dollar weakens against the euro, American goods become cheaper for Europeans, boosting U.S. exports. Conversely, foreign goods become more expensive for Americans, reducing imports. Monetary economics studies how central banks manage money supply and interest rates, affecting exchange rates and overall economic stability. A stable currency is crucial for fostering economic growth and encouraging international trade.