91Ó°ÊÓ

All other things being constant, the rate of return must be affecting the exchange rate of a currency in an economy.

A high rate of return of a currency in an economy will make investors more interested in converting their currency to other currency, currency's demand will increase and the exchange rate will also increase. So, the currency of an economy experiencing a high rate of return tends to have a strong exchange rate and attract more funds from foreign investors.

The diagram given below shows that, with a higher interest rate of currency, demand for currency increases, and the demand curve will shift to rightward direction from $D$to $D_1$whereas the supply curve will shift in leftward direction from $S$to $S_1$. The new equilibrium point is determined at$E_1$. At a point $E_1$, the high-interest rate is determined at $R\_\left\{1\right\}$

The diagram is given below