unit 7 5/8/17

Mechanics of foreign exchange

• Foreign exchange
• The buying and selling of Currency
• Any transaction that occurs in the balance of payments necessitates foreign exchange
• The exchange rate is determined in the foreign currency markets
• Simply put, the exchange rate is the price of a Currency
• Changes in exchange rates
• Exchange rates are a function of the supply and demand for Currency
• An increase in the supply of Currency will decrease the exchange rate of a Currency
• A decrease in supply of a Currency will increase the exchange rate of a Currency
• An increase in the demand for Currency would increase the exchange rate of a currency
• A decrease in the demand for a currency will decrease the exchange rate of a Currency
• Appreciation and depreciation
• Appreciation of a Currency occurs when the exchange rate of a Currency increases
• Depreciation is when the exchange rate of that Currency decreases
• Exchange rate determinants
• Consumer tastes
• Relative income
• Relative price level
• Speculation
• Exports and imports
• When the American money appreciates it causes our goods to be more expensive and foreign goods to be cheaper. Exports decrease and imports increase.
• Exchange rate determined by exports and imports
• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be more expensive. Exports increase and imports decrease