Unit 7: Foreign Exchange Market (4/15)

Foreign Exchange: 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 (demand) Euros)

- The exchange rate (e) is determined in the foreign currency markets. 

- Simply put, the exchange rate is the price of a currency. 

- Do not try to calculate the exact exchange rate. 

Tips:

- Always change the D line on one currency graph, the S line on the other currency's graph. 

- Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer. 

- If D on one graph increases, S on the other will also increase. 

- If D moves to the left, S will move to the left on the other graph. 

Changes in Exchange Rates:

- Exchange rates (e) are a function of the supply and demand for currency. 

- An increase in the supply of a currency will make it cheaper to buy one unit of that currency. 

- A decrease in supply of a currency will make it more expensive to buy one unit of that currency. 

- An increase in demand for a currency will make it more expensive to buy one unit of that currency. 

- A decrease in demand for a currency will make it cheaper to buy one unit of that currency

Appreciation of a currency occurs when the exchange rate of that currency increases (e goes up)

Depreciation of a currency occurs when the exchange rate of that currency decreases (e goes down)

- One hundred yen used to buy one dollar. Now 50 yen buys one dollar. 

- The dollar is weaker because it takes fewer Yen to buy one dollar. 

Exchange Rate Determinants

- Consumer Tastes

- Relative Income 

- Relative Price Level

- Speculation