#AP Macroeconomics: Exchange Rates - The Night Before 🌃

Hey! Let's nail this exam. We're going to break down exchange rates, how they work, and what makes them tick. Think of this as your last-minute cheat sheet, packed with everything you need to feel confident. Let's get started!

#What are Exchange Rates?

Exchange rates are simply the price of one currency in terms of another. It's how much of one currency you need to buy another. Think of it like a price tag for different countries' money. 💰

• Increase in Exchange Rate: Means it's more expensive to buy that currency, making goods from that country pricier.
• Decrease in Exchange Rate: Means it's cheaper to buy that currency, making goods from that country cheaper.

#The Gold Standard: A Blast from the Past 🕰️

Before the Great Depression, many countries used the gold standard. This meant exchange rates were fixed and tied to the value of gold.

• Fixed Exchange Rates: No daily fluctuations, unlike today.
• Arbitrage: People could exploit price differences by trading gold between currencies. (Buy gold with dollars, use gold to buy francs, use francs to buy more dollars).
• Problem: It didn't work well, often causing trade imbalances. Many economists believe it contributed to the Great Depression.

#Cost of a US Dollar: Appreciation vs. Depreciation

Let's look at some examples:

Cost of one U.S. Dollar

• British Pound: Exchange rate increased (.75 to .80). The pound appreciated (became more expensive).
• Euro: Exchange rate decreased (1.10 to 1.05). The euro depreciated (became less expensive).

Calculating Prices: To find the price of a U.S. good in another currency, multiply the U.S. price by the exchange rate. Example: $300 hotel room...