Unit 7
Mechanics of Foreign Exchange
- The buying and selling of currency
- Any transactions that occurs in the Balance of Payments necessitates foreign exchanges
- The exchange rate is determined in the foreign currency market
- Exchange rates (e) are a function of the supply and demand for currency
- An increase in supply of a currency will decrease exchange rate of currency
- A decrease in supply of currency will increase exchange rate of a currency
- An increase in demand for a currency will increase the exchange rate of a currency
- A decrease in demand for a currency will decrease the exchange rate of a currency
- Appreciation of a currency occurs when the exchange rate of that currency increases
- Depreciation of a currency occurs when the exchange rate of that currency decreases
- Consumer Tastes
- Relative Income
- Relative Price Level
- Speculation
- Exchange rate is a determinant of both exports and imports
- Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
- Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
- Based upon supply and demand of that currency vs other currencies
- Very sensitive to business cycle and provides options for investments
- Based on a country's willingness to distribute currency and to control the amount
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