Foreign Exchange ( FOREX )

• buying / selling of currency
• ex : in order to purchase souvenirs in France, 1st recession for American to sell ( supply ) their dollar and buy ( demand ) Euros
• exchange rate is determined in the foreign currency markets
• ex : currency exchange rate is approximately 77 yen to 1 U.S. dollar
• simply put, exchange rate is price of currency
• do not try to calculate exact exchange rate
• ALWAYS change the demand line on one currency graph, the supply line on the other economy's graph
• MOVE the lines on the two currency graphs in the same direction ( R or L ) and you will have the correct answer
• IF demand on the other graph increases, supply on the other will also increase
• IF demand moves to the L, supply will move to the L on the other graph

Changes in Exchange Rates

• exchange rates are a function of the supply and demand for currency
• increase in supply of currency will make it cheaper to buy one unit of the currency
• decrease in supply of currency will make it more expensive to buy one unit of that currency
• increase in the demand of currency will make it more expensive to buy one unit of that currency
• decrease in the demand of currency will make it cheaper to buy one unit of that currency

Appreciation

• appreciation of a currency occurs when the exchange rate of that currency increases
• hypothetically : 100 Yen used to buy $1, now 200 Yen to buy $1
•  dollar is "stronger" because one buys more Yen than it used to

Depreciation

• depreciation of currency occurs when the exchange rate of that currency decreases
• hypothetically : 100 Yen used to buy $1, now 50 Yen buys $1
• dollar is weaker because it takes fewer Yen to buy $1

- extra -

• Supply of money : comes from U.S. citizens, banks, and industries wanting to purchase government investments and assets
• making transfer payments to foreigners
• Demand of money : comes from foreigners making transfer payments to the U.S.

Dollar Appreciation :

• each dollar gets you more of the other currency
• U.S. exports gets more expensive for foreigners
• U.S. imports gets cheaper for us
• dollar leaving U.S.
• exports decrease
• imports increase
• Net exports decrease
• GDP decreases
• demand of dollar increases
• supply of dollar decreases

Dollar Depreciation :

• each dollar gets you less of the other currency
• less of foreign currency is needed to get dollar
• exports increase
• imports decrease
• money either enters U.S. :
• Net exports increase
• GDP increase
• Demand of dollar decreases
• Supply of dollar increases

On the Graph, it is inverse between demand and supply, but they move in the same direction between increase or decrease.