AP Econ Foreign Exchange Market Flashcards
When a country appreciates vs. depreciates
Appreciates: exports decrease and imports increase
Depreciate: exports increase and imports decrease
Equilibrium exchange rate
The exchange rate at which the quantity of the currency demanded in foreign exchange market is equal to the quantity supplied
When US increases exports to a foreign country
The foreign importer will buy US dollars and sell their own, so increase in demand for US and increase in supply of foreign
When the US imports more
US importers will buy more of the other currency and sell dollars, so US supply increased and foreign demand increased
Trade deficit
When a country imports more than they export to another country
Trade surplus
When a country exports more than they import to another country
When the value of a currency appreciates, and
The county’s exports will become more expensive and the amount of exports will decrease
Determinants of exchange rate
- change in tastes
- change in incomes
- change in relative prices
- change in real interest rates
What helps lead to inflation
Depreciation of exchange rate, since input prices would be more expensive so to keep a constant profit, prices will be increased
In the article, what caused the cost of imports to decrease
The effects of a strong dollar, falling input prices, and foreign economic weakness
What happened due to the decreased cost of inputs
Inflation is kept low
Reasons the dollar has strengthened
The US economy is doing well in relation to others so is a good place to invest
The fed appears about to tighten policy, so attractive globally
Fixed exchange rate
When the government keeps the exchange rate against other currency at or near a particular target
Exchange market intervention
Government purchases or sales of currency in the foreign exchange market
Foreign exchange market
Currencies are traded/exchanged for, since goods and services produced in a country must be paid for in that currency
