6.3: The Foreign Exchange Market Flashcards
Demand for Dollars
There is an inverse relationship of the exchange rate (price) and the quantity demand
Who supplies dollars?
Americans supply dollars
Supply of Dollars
There is a direct relationship b/w exchange rate (price) and quantity supplied
Where can a shortage be found on the foreign exchange market graph?
Under the equilibrium
What do shortages cause?
The exchange rate to rise
Where can a surplus can be found on the foreign exchange market?
Above the equilibrum
What do surpluses cause?
The exchange rate to fall
What is the foreign exchange market?
Its where foreign currency is exchange is a country demands for a certain currency they must supply with their own currency
What happens if Europeans prefer vacationing in the US?
The US dollar would appreciate because the demand for the dollar would increase causing the exchange rate to increase.
Whereas the Euro would depreciate because the supply of the Euro would increase causing the exchange rate to decrease.
The value of a country’s currency tends to appreciate when…?
A) demand for country’s exports increase
B) the country’s money supply increases
C) the country’s citizens increase their travel abroad
D) domestic interest rates decrease
E) tariffs on the country’s import decrease
a
Shifters of the Foreign Exchange Market(FOREX)
- Changes in Taste
Ex. British tourists’ flocks to the US
- US appreciates (demand shifts right)
- Pound depreciates ( supply shifts right) - Changes in Relative Income (Resulting in more Imports)
Ex. US growth increases incomes
US buys more imports
US depreciates (supply increases)
Pound appreciates( demand increases) - Changes in Relative Price Level(Resulting in more imports)
Ex. US prices increase relative to Brit.
-US demands for cheaper imports increases
US depreciates (supply shift right)
Pound appreciates( demand shift right) - Changes in relative Interest rates
Ex. US has a higher interest rate than Brit.
- Brit. people put their money in US banks
Capital Flow increases towards the US
-Dollar appreciate
-Pound depreciate
What will happen to the international value of pesos if there is high inflation in Mexico?
Pesos will depreciate
- Demand for pesos will decreases b/c trading partners wouldn’t want to buy currency at a higher price
-Supply increases b/c Mexico will look to buy lower priced imports
What will happen to the international value of pesos if the interest rate dropped?
Pesos depreciate
Demand drop b/c people will buy less financial assets from Mexico
Supply increases b/c Mexicans will buy more financial assets
An appreciation of the US dollar in the foreign exchange market can be caused by the decrease in which of the following?
A) US interest rates
B) US price index
C) Demand for the dollar by US resident
D) Exports from the US
E) The tariff on goods made into the US
B
Fixed Exchange Rate
the gov. actively manages the country’s currency
