What are three factors that determine the value of money?

1 Answer | Add Yours

dkrupp87's profile pic

dkrupp87 | (Level 1) Adjunct Educator

Posted on

The first factor, and most important, is the balance of trade and investment. This is determined by the gap in exports and imports for a country. This is essentially like supply and demand. If the United States is exporting more products, there is more of a demand for the US dollar. The importing country will then have to convert their currency to dollars in order to pay for the products. The second factor would be market psychology. If unemployment would grow, and production would decrease, the value of the dollar would decrease. Foreign countries may sell their bonds that are in the US dollar in return for their local currency. The third factor would be economic indicators, like GDP, CPI, and payroll data. If the economic indicators indicate that the US economy is growing, often the value of the dollar will increase.

During the recession of 2007, the government intervened and by increasing spending and issuing more debt (bonds). By doing so, they hoped to increase jobs, so more products were produced and more things were purchased by consumers. By selling more bonds, they essentially printed more money, flooding the market with dollars and decreasing the value of the dollar. So, the sentiment was negative, and the supply of the dollar was great, driving the value of the dollar down. 

We’ve answered 318,915 questions. We can answer yours, too.

Ask a question