• the buying and selling of currency
• the exchange rate (e) is determined in the foreign currency market
- ex. The current exchange rate is approximately 77 Japanese yens to 1$
• simply put the exchange rate is the price of a currency
• do not try to calculate the exact exchange rate
Tip
• 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 on the same direction (left or right) and you will have the correct answer
• if D on one graph, S in the other will also increase
• If D moves to the left, S will move to the left on the other
Changes in Exchange Rates
• exchange rate (e) are a function of the supply and demand for currency
- an increase in the supply of a currency will make it cheaper to bye one unit of that currency
- a decrease in supply of a currency will make it more expensive to but one unit of that currency
- an increase in demand for a currency will make it more expensive to buy one unit of that currency
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Appreciation
• appreciation of a currency occurs when the exchange rate of that currency increases (e^)
- hypothetical: 100 yens used to buy 1$
Depreciation
• depreciation of a currency occurs when the exchange rate of that currency decreases (e down)
Exchange rate determinants
• consumer tastes
- the increase in demand of the ten leads to the appreciation of the yen
- the increase in the supply of dollars
• relative income.
- imports tend to be normal goods
- this increases the demand for the dollar, causing the dollar to appreciate and the peso to depreciate
• relative price level
• speculation
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