-Ex: in order to purchase souvenirs in France, it is first necessary for Americans to sell (supply) their dollars and buy (demand) Euros.
•The Exchange adage is determined in the foreign currency markets.
-Ex: The current exchange rate is approximately 77 Japanese Yen to 1 US dollar.
•Simply put the exchange rate is the price of a currency
•Do not try to calculate the exact exchange rate.
TIPS
•Always change the D line on one currency graph, the S like on the other currency's graph
•Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer.
•If D on one graph increases, S on the other will also increase.
•If D moves to the left, S will move got the left on the other graph.
-Changes in Exchange Rates
•Exchange rates (e) are a function of the supply and demand for currency.
-An increase in the supply of a currency will make it cheaper to buy one unit of that currency.
- A decrease in supply of a currency will make a more expensive to buy one unit of that currency.
-An increase in demand for a currency will make it more expensive to buy one unit of that currency
- A decrease in demand for a currency will make it cheaper to buy one unit of that currency
-Appreciation
•Appreciation of a currency occurs when the exchange rate of that currency increases (e^)
-Hypothetical: 100 Yen used to buy $1.
Now 200 Yen buy 1US$.
- The dollar is "stronger" because one buys more Yen than it used to.
-Depreciation of a currency occurs when the exchange rate of that currency decreases
-100 Yen used to buy one dollar. Now 50
Yen buys one dollar.
- The dollar is weaker because it takes
Fewer Yen to buy one dollar.
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