- The
buying and selling of currency.
- EX:
In order to purchase souvenirs in France, it is first necessary for
Americans to sell (supply) their dollars and buy (demands) Euros.
- The exchange rate (e) is determined in the foreign currency markets.
- Always
change the D line on the one currency graph, the S line in the other
currency graph
- Move
lines of two currency graphs in the same direction and you will have the
correct answer.
- If D
on one graph moves up then so will the S on the other graph. And same if D
on one graph moves left then S on the other graph will also move
left.
Changes in Exchange Rates:
-Exchange
rates are a function of the supply and demand for currency.
-Increasing
of supply in a currency will make it cheaper to buy one unit of that
currency.
-Decreasing
in supply of a currency will make it more expensive to buy one unit of
that currency.
-Increase
in demand for a currency will make it more expensive to buy one unit of
that currency.
-Decrease
in demand for a currency will make it cheaper to buy one unit of that
currency.
Appreciation: occurs when the exchange rate of that currency
increases
Depreciation: occurs when the exchange rate of that currency
decreases.
Exchange Rate Determinants:
- Consumer
taste
- Relative
income
- Relative
price level
There are often more determinants in exchange rate than the three you have just listed. A consumer's taste, relative income, and relative price level are indicators, but we must also include the scenario of future outcomes and interest rates. Appreciation occurs when the demand curve increases, or when the supply curve decreases. A country would demand another country's currency if the other country is in a recession because of relative cheap prices, thus appreciating the value of their dollar.
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