Glossary
Capital Investment
Spending by businesses on new physical capital goods, such as machinery, equipment, or buildings, to increase productive capacity.
Example:
A car manufacturer building a new assembly plant is undertaking capital investment, which boosts long-term production capabilities.
Contractionary Monetary Policy
Actions taken by a central bank to decrease the money supply and raise interest rates, aiming to curb inflation.
Example:
If the European Central Bank raises interest rates to cool down an overheating economy, it's engaging in contractionary monetary policy.
Currency Appreciation
An increase in the value of one country's currency relative to another, meaning it can buy more units of the foreign currency.
Example:
If the U.S. dollar strengthens from 1 = 110 yen, the dollar has experienced currency appreciation.
Currency Depreciation
A decrease in the value of one country's currency relative to another, meaning it can buy fewer units of the foreign currency.
Example:
If the euro weakens from €1 = 1.10, the euro has experienced currency depreciation.
Demand for Foreign Exchange
The desire by foreigners to acquire a country's currency, typically to purchase its goods, services, or financial assets.
Example:
If German consumers want to buy more American-made cars, their increased desire for U.S. dollars represents an increased demand for foreign exchange for the USD.
Exchange Rate
The price of one country's currency expressed in terms of another country's currency.
Example:
If 1 U.S. dollar can be traded for 0.92 euros, then 0.92 euros per dollar is the exchange rate.
Expansionary Monetary Policy
Actions taken by a central bank to increase the money supply and lower interest rates, aiming to stimulate economic growth.
Example:
When the Federal Reserve lowers the federal funds rate, it's implementing expansionary monetary policy to encourage borrowing and spending.
FOREX Market Equilibrium
The point in the foreign exchange market where the quantity of a currency demanded equals the quantity supplied, determining the prevailing exchange rate.
Example:
The intersection of the supply and demand curves for the Japanese yen against the U.S. dollar indicates the FOREX Market Equilibrium for that currency pair.
Financial Investment
The purchase of financial assets like stocks, bonds, or other securities, typically with the expectation of a return.
Example:
Buying shares of a company on the stock market or purchasing government bonds are common forms of financial investment.
Foreign Exchange Market (FOREX)
A global, decentralized marketplace where national currencies are traded, determining their relative values.
Example:
When a traveler exchanges U.S. dollars for Japanese yen before a trip, they are participating in the Foreign Exchange Market.
Interest Rates (FOREX Impact)
The cost of borrowing money or the return on savings and investments, which significantly influences international capital flows and currency demand.
Example:
Higher interest rates in Canada compared to the U.S. would make Canadian bonds more attractive to American investors, increasing demand for the Canadian dollar.
Net Exports
The total value of a country's exports minus the total value of its imports.
Example:
If the U.S. sells more goods and services abroad than it buys from other countries, it has positive net exports, contributing to its GDP.
Supply of Foreign Exchange
The amount of a country's currency that its residents are willing to sell to acquire foreign currencies for purchasing foreign goods, services, or assets.
Example:
When U.S. investors decide to buy bonds issued by the British government, they supply U.S. dollars to get British pounds, increasing the supply of foreign exchange for the USD.