Unit 7; Day 3

• Foreign Exchange Market
• The buying and selling of currency
• Ex. In order to purchase souvenirs in France, it is first necessary for americans to sell their dollars and buy Euros
• Transaction that occurs in the balance of payments necessitate foreign exchange. 
• Changes in Exchange Rates
• An increase in the supply of currency will decrease the exchange rate of a currency
• A decrease in supply of a currency will increase exchange rate
• Increase in demand for a currency increases exchange rate
• Decrease in demand for currency will decrease exchange rate
• Appreciation and Depreciation
• Appreciation of a currency occurs when exchange rate increases
• Deprecation currency occurs when exchange rate decreases
• Ex. Germans go to america, Supply of euros increase, demand for dollars increase. Euro depreciates, Dollar appreciates
• Exchange Rate Determinants 
• Consumer tastes
• Ex. Preference for jap. Goods creates increase in S of dollars, depreciation of dollar
• Relative Income
• Relative Price Level
• Speculation
• Exports and Imports
• The exchange rate is a determinant of both exports and imports
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be cheaper thus reducing exports and increasing imports
• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports

 

As the demand for a foreign currency increases, the supply of US currency increases to match the conversion. This results in a depreciation of the dollar(aka lower price levels) and an appreciation of foreign currency(increased prices for foreign currency)