FOREIGN EXCHANGE MARKETS NOTES (4/21/15)

• Buying and selling of currency
• Ex.: in order to purchase souvenirs in France, first necessary for Americans to sell (supply) their dollars and buy (demand) Euros
• Exchange rate (e) is determined in the foreign currency markets
• Ex.: currency exchange rate is approximately 77 yen to 1 US $
• Simply put, exchange rate is the price of a currency
• Do not try to calculate exact exchange rate

Tips

• Always change the D(emand) on one currency graph, the S(upply) line on the other currency graph
• Move the lines on the two currency graphs in the same direction (R/L) and you will have the correct answer
• If D on one graph increases, S on the other graph will also increase
• If D moves to the left, S will move to the left on the other graph

Changes in Exchange Rates

• Exchange rates (e) are a function of the supply and demand for currency
• increase in supply of currency will make it cheaper to buy one unit of that currency
• decrease in supply of currency will make it more expensive to buy one unit of that currency
• increase in demand for a currency will make it more expensive to buy one unit of that currency
• decrease in demand for a currency will make it cheaper to buy one unit of that currency

Appreciation

• Occurs when the exchange rate of that currency increases
• Hypothetical: 100 Yen used to buy $1, now 200 Yen buys $1
• dollar is "stronger" because one buys more Yen than it used to

Depreciation

• Occurs when the exchange rate of that currency decreases
• 100 Yen used to buy $1, now 50 Yen buys $1
• dollar is weaker because it takes fewer Yen to buy $1