All Flashcards
What does a rightward shift in the demand curve for a currency indicate?
An increase in demand for that currency, leading to appreciation.
What does a rightward shift in the supply curve for a currency indicate?
An increase in the supply of that currency, leading to depreciation.
On a FOREX graph, what is on the vertical axis?
The price of the currency (exchange rate).
On a FOREX graph, what is on the horizontal axis?
The quantity of the currency.
How is the equilibrium exchange rate determined on a FOREX graph?
It's the intersection of the supply and demand curves.
What happens to the equilibrium exchange rate when demand increases?
The exchange rate increases (currency appreciates).
What happens to the equilibrium exchange rate when supply increases?
The exchange rate decreases (currency depreciates).
Show the effect of an increase in demand for Japanese goods by U.S. consumers on a graph of the foreign exchange market for the U.S. dollar.
The demand curve for dollars shifts to the left.
Show the effect of the Federal Reserve increasing the money supply on a graph of the foreign exchange market for the U.S. dollar.
The supply curve for dollars shifts to the right.
What does the slope of the demand curve for a currency represent?
The inverse relationship between the exchange rate and the quantity of currency demanded.
How does increased demand for US exports affect the dollar?
It increases the demand for dollars, causing the dollar to appreciate.
How does increased US demand for European goods affect the dollar?
It increases the supply of dollars, causing the dollar to depreciate.
How do higher U.S. interest rates affect the demand for dollars?
They increase the demand for dollars as U.S. assets become more attractive to foreign investors.
How does expansionary monetary policy affect the exchange rate?
It lowers interest rates, decreasing demand for the dollar and causing it to depreciate.
How does contractionary monetary policy affect the exchange rate?
It raises interest rates, increasing demand for the dollar and causing it to appreciate.
If the dollar appreciates, what happens to U.S. exports?
U.S. exports become more expensive for foreigners, so they likely decrease.
If the dollar depreciates, what happens to U.S. imports?
U.S. imports become more expensive for Americans, so they likely decrease.
How does increased foreign income affect the demand for US goods?
It increases the demand for US goods, leading to increased demand for US dollars and dollar appreciation.
How does a decrease in the U.S. price level affect the dollar?
It makes U.S. goods cheaper, increasing demand for dollars and causing the dollar to appreciate.
How does speculation that a currency will rise affect its value?
It increases demand for the currency, causing it to appreciate.
Define Foreign Exchange Market (FOREX).
A market in which currencies are traded.
What is currency appreciation?
An increase in the value of one currency relative to another.
What is currency depreciation?
A decrease in the value of one currency relative to another.
Define exchange rate.
The price of one currency expressed in terms of another currency.
What drives the demand for a currency?
The desire to purchase goods/services or invest in that country.
What drives the supply of a currency?
The desire to purchase goods/services or invest in other countries.
Define net exports.
The value of a country's exports minus the value of its imports.
What is expansionary monetary policy?
A monetary policy that increases the money supply and lowers interest rates.
What is contractionary monetary policy?
A monetary policy that decreases the money supply and raises interest rates.
Define equilibrium exchange rate.
The exchange rate at which the quantity of currency demanded equals the quantity supplied.