ABSTRACT
This chapter examines the relationship between monetary policy, interest rates, and the exchange rate. The exchange rate is the price of one currency in terms of another currency. A change in the exchange rate is described as depreciation or an appreciation. A depreciation of the dollar against the pound is an increase in the dollar price of pounds. The settlement of international liabilities stated in terms of foreign currencies often compels households, firms, and financial institutions to buy and sell currencies in the international market. This currency market is called the foreign exchange market. The major participants in this market are commercial banks, non-bank financial institutions, multinational corporations, and central banks. The chapter provides an example to illustrates how exchange rates are used, together with interest rates, to calculate and rank rates of return of different currency denominated bank accounts.
