What is the difference between currency appreciation and depreciation?
Appreciation is an increase in value, while depreciation is a decrease in value.
Differentiate between nominal and real exchange rates.
Nominal is the rate at which currencies are traded. Real adjusts for price level differences.
What is the difference between capital investment and financial investment?
Capital investment is spending on physical assets; financial investment is buying financial assets.
Compare the effects of increased demand for exports vs. increased demand for imports on a country's currency.
Increased export demand appreciates the currency; increased import demand depreciates it.
Compare expansionary and contractionary monetary policy effects on interest rates.
Expansionary policy lowers interest rates; contractionary policy raises them.
Compare the effects of higher domestic vs. higher foreign interest rates on a country's currency.
Higher domestic rates appreciate the currency; higher foreign rates depreciate it.
What is the difference between a floating and a fixed exchange rate?
Floating rates are determined by market forces; fixed rates are set by the government.
Compare the impact of a tariff and a quota on imports.
Tariffs generate revenue for the government, while quotas do not.
Compare the short-run and long-run effects of expansionary monetary policy on the exchange rate.
Short-run depreciation, long-run potential appreciation due to inflation.
Contrast the effects of an increase in demand for a country's goods with an increase in its money supply on the exchange rate.
Increased demand appreciates the currency; increased money supply depreciates it.
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.
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.
