Foreign Exchange : The buying/selling of currency

• Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell  their dollars and buy  Euros

• The exchange rate is determined in the foreign currency markets
• Ex. The current exchange rate is approximately 77 Japanese Yen to 1 US dollar

• Exchange rate is price of a currency

4 Important 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 

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

• If D moves left, S moves left on other graph

Changes in Exchange Rates:

• Exchange rates are a function of the supply and demand for currency
• An increase in supply of currency makes it cheaper to buy one unit of it, vice versa for a decrease in supply
• An increase in demand of currency will make buying one unit more expensive, vice versa for decrease in demand

• Appreciation - Occurs when the exchange rate of that currency increases 

• Depreciation - Occurs when exchange rate of that currency decreases 

Determinants of Exchange Rate:
Consumer Tastes

• Ex. A preference for Japanese goods creates an increase in demand of Yen and an increase in the supply of the dollar

Relative Economy

• Imports tend to be normal goods
• Increases demand for dollar, causing dollar to appreciate and the peso to depreciate

Relative Price Level

• If PL is higher in Canada than in US, American g

Speculation

• Other currency will appreciate as demand for it increases
• Supply of dollar will increase causing it to depreciate