Phase IFoundation
Background
Overview
Essential for understanding the complex interplay between domestic economic policies and international financial markets, the causes of currency fluctuations, and their implications for trade, investment, and inflation. Relevant for GS3.
Monetary policy, primarily managed by central banks, involves controlling money supply and interest rates to achieve macroeconomic objectives like price stability and economic growth. Changes in a country's interest rates relative to others (interest rate differentials) significantly influence capital flows and, consequently, the demand for and supply of its currency, thereby affecting its exchange rate.