Unit 7: Mechanics of foreign exchange (FOREX) 5/8/17

- Buying and selling of currency
- Any transaction that occurs in the balance of payments necessitates foreign exchange
- The exchange rate (e) is determined in the foreign currency markets
- The exchange rate is the price of a currency

Changes in Exchange Rates:
- Exchange rates (e) are a function of the supply and demand for currency
- An increase in supply of a currency will decrease the exchange rate of a currency.
- A decrease in supply of a currency will increase the exchange rate of a currency.
- An increase in demand of a currency will increase the exchange rate of a currency.
- A decrease in demand of a currency will decrease the exchange rate of a currency.

Appreciation and Depreciation:
- 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

Exchange Rate Determinants:
- Consumer Tastes
- Relative Income
- Relative Price Level
- Speculation

Exports and Imports:
- The 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


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