In this lesson on Exchange Rates, you have learned the following concepts:
*Why do currencies fluctuate?
*What causes a currency to appreciate relative to another currency?
*Why do currencies fluctuate?
*What causes a currency to appreciate relative to another currency?
2. U.S. is a safer haven for Europeans to
save their money.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
save their money.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
1. Preferences to purchase foreign goods
and services.
The European countries' income rises
faster than U.S. income.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
and services.
The European countries' income rises
faster than U.S. income.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
1. Preferences to purchase foreign goods
and services.
The European countries' Real GDP rises
faster than Real GDP in the U.S.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
and services.
The European countries' Real GDP rises
faster than Real GDP in the U.S.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
5. A foreign country pegs its currency to
the U.S. Dollar.
The U.S. Dollar appreciates relative to the
Euro and the Euro depreciates relative to
the U.S. Dollar.
OR
The U.S. Dollar depreciates relative to the
foreign currency and the foreign currency
appreciates relative to the U.S. Dollar.
the U.S. Dollar.
The U.S. Dollar appreciates relative to the
Euro and the Euro depreciates relative to
the U.S. Dollar.
OR
The U.S. Dollar depreciates relative to the
foreign currency and the foreign currency
appreciates relative to the U.S. Dollar.
3. U.S. real interest rates are higher than
European countries' real interest rates.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
European countries' real interest rates.
The U.S. Dollar appreciates relative to the
Euro.
The Euro depreciates relative to
the U.S. Dollar.
Exchange Rates (Axes) (3:21 minutes)
Reffonomics.com 3 x 3 Videos (3-minute videos + 3 Multiple Choice Questions)
Exchange Rates (Currency Exchange Market) (3:38 minutes)
Exchange Rates (Appreciation/Depreciation) (3:44 minutes)
Exchange Rates (Brexit 2016, Dollar/Pound Charts) (2:08 minutes)
In this lesson on Exchange Rates, you will learn the following concepts:
*Why do currencies fluctuate?
*What causes a currency to appreciate relative to another currency?
*Why do currencies fluctuate?
*What causes a currency to appreciate relative to another currency?
Exchange Rates
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |
Why do currencies fluctuate?
By looking above at what you are going to learn in this lesson, it looks as if
it is going to be an easy lesson to learn. On the contrary, this lesson will
be packed with information on the Currency Exchange Market.
The lesson below is one of the first lessons I wrote for this book back in 2002
and revised in 2017:
it is going to be an easy lesson to learn. On the contrary, this lesson will
be packed with information on the Currency Exchange Market.
The lesson below is one of the first lessons I wrote for this book back in 2002
and revised in 2017:
If there is a change in any of the five MAIN reasons below, this will
change the value of one country's currency relative to another country's
currency:
1) Preferences to purchase foreign goods and services
A) Change in Price Level of a country relative to another country
B) Change in Real GDP of a country relative to another country
C) Change in National Income of a country relative to another country
2) Safe haven to place financial assets
3) Real interest rate
4) Large public sector borrowing
5) Government manipulation of currency
change the value of one country's currency relative to another country's
currency:
1) Preferences to purchase foreign goods and services
A) Change in Price Level of a country relative to another country
B) Change in Real GDP of a country relative to another country
C) Change in National Income of a country relative to another country
2) Safe haven to place financial assets
3) Real interest rate
4) Large public sector borrowing
5) Government manipulation of currency
1. Preferences to purchase foreign goods
and services.
The European countries' price level goes
down relative to the U.S. price level.
The U.S. Dollar depreciates relative to the
Euro.
The Euro appreciates relative to
the U.S. Dollar.
and services.
The European countries' price level goes
down relative to the U.S. price level.
The U.S. Dollar depreciates relative to the
Euro.
The Euro appreciates relative to
the U.S. Dollar.
4. European countries believe the U.S.
might default on its debt.
The Dollar depreciates relative to
the Euro.
The Euro appreciates relative to
the Dollar.
might default on its debt.
The Dollar depreciates relative to
the Euro.
The Euro appreciates relative to
the Dollar.
Preferences to purchase foreign goods and services
A) Change in Price Level of a country relative to another country
B) Change in Real GDP of a country relative to another country
C) Change in National Income of a country relative to another country
Safe Haven to place financial assets
Real Interest Rates
Large Public Sector Borrowing
Government manipulation of currency
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
By pressing the up arrow, you can see how
the U.S. Dollar appreciates relative to the
Euro and how the Euro depreciates relative
to the U.S. Dollar. Notice how a U.S.
Dollar buys more Euros and a Euro buys
fewer U.S. Dollars
By pressing the down arrow, you can see
how the U.S. Dollar depreciates relative to
the Euro and how the Euro appreciates
relative to the U.S. Dollar. Notice how a
Euro buys more U.S. Dollars and a U.S.
Dollar buys fewer Euros.
the U.S. Dollar appreciates relative to the
Euro and how the Euro depreciates relative
to the U.S. Dollar. Notice how a U.S.
Dollar buys more Euros and a Euro buys
fewer U.S. Dollars
By pressing the down arrow, you can see
how the U.S. Dollar depreciates relative to
the Euro and how the Euro appreciates
relative to the U.S. Dollar. Notice how a
Euro buys more U.S. Dollars and a U.S.
Dollar buys fewer Euros.
By pressing the up arrow, you can see how
the U.S. Dollar appreciates relative to the
Yuan and how the Yuan depreciates
relative to the U.S. Dollar. Notice how
the U.S. Dollar buys more Yuans and a
Yuan buys fewer U.S. Dollars.
By pressing the down arrow, you can see
how the U.S. Dollar depreciates relative to
the Yuan and how the Yuan appreciates
relative to the U.S. Dollar. Notice how
a Yuan buys more in U.S Dollars and a
U.S. Dollar buys fewer Yuans.
the U.S. Dollar appreciates relative to the
Yuan and how the Yuan depreciates
relative to the U.S. Dollar. Notice how
the U.S. Dollar buys more Yuans and a
Yuan buys fewer U.S. Dollars.
By pressing the down arrow, you can see
how the U.S. Dollar depreciates relative to
the Yuan and how the Yuan appreciates
relative to the U.S. Dollar. Notice how
a Yuan buys more in U.S Dollars and a
U.S. Dollar buys fewer Yuans.
To recap some of what you learned above, if an entity wants to purchase a
good or service from another country or wants to take their currency and
place it into a financial institution inside another country, it must exchange
its currency into the other country's currency in the currency exchange
market. This is just simple supply and demand.
If an entity wants to purchase a good or service from another country, it
must SUPPLY its currency to the currency exchange market to purchase
(DEMAND) the other country's currency.
If an entity wants to save its financial capital in another country (higher
rate of return, safer place to hold money), it must first exchange (SUPPLY)
its currency to the currency exchange market to purchase (DEMAND)
the other country's currency.
good or service from another country or wants to take their currency and
place it into a financial institution inside another country, it must exchange
its currency into the other country's currency in the currency exchange
market. This is just simple supply and demand.
If an entity wants to purchase a good or service from another country, it
must SUPPLY its currency to the currency exchange market to purchase
(DEMAND) the other country's currency.
If an entity wants to save its financial capital in another country (higher
rate of return, safer place to hold money), it must first exchange (SUPPLY)
its currency to the currency exchange market to purchase (DEMAND)
the other country's currency.
From this point forward when studying the currency exchange market
you will be drawing side-by-side graphs. One graph will relate to that
entity's country currency (Country A) and the other graph relating to the other
country's currency (Country B).
Looking at the side-by-side graphs below, you notice that the United States
Dollars are the first graph and the Mexico Pesos are the second graph.
Notice on the y axes on the graphs the P of FC (foreign currency) per Dollar is
the price of the peso per U.S. Dollar and the P of FC (foreign currency)
per Peso is the price of the U.S. Dollar per Peso.
you will be drawing side-by-side graphs. One graph will relate to that
entity's country currency (Country A) and the other graph relating to the other
country's currency (Country B).
Looking at the side-by-side graphs below, you notice that the United States
Dollars are the first graph and the Mexico Pesos are the second graph.
Notice on the y axes on the graphs the P of FC (foreign currency) per Dollar is
the price of the peso per U.S. Dollar and the P of FC (foreign currency)
per Peso is the price of the U.S. Dollar per Peso.
ER
ER1
ER1
up
down
Q
Q1
Q1
up
down
Q (dollars)
P of FC
/ $
/ $
same
Dollar Graph
ER
ER1
ER1
up
down
Q
Q1
Q1
up
down
Q (pesos)
P of FC
/ Peso
/ Peso
same
Peso Graph
Show by moving a curve on each of the graphs if the following changes
occur:
1) The U.S. purchases more goods and services from Mexico.
2) Mexico citizens want to put more of their money in U.S. banks.
3) Mexico's economy is booming and RGDP is rising quickly.
4) U.S. price level is rising relative to the Mexico's price level.
5) To increase exports, Mexico's central bank intervenes in the currency market.
Answers shown at the end of this lesson.
occur:
1) The U.S. purchases more goods and services from Mexico.
2) Mexico citizens want to put more of their money in U.S. banks.
3) Mexico's economy is booming and RGDP is rising quickly.
4) U.S. price level is rising relative to the Mexico's price level.
5) To increase exports, Mexico's central bank intervenes in the currency market.
Answers shown at the end of this lesson.
Answers to questions on graphs above:
1) The U.S. purchases more goods and services from Mexico.
U.S. supply of dollars increases; demand for pesos increases.
2) Mexico citizens want to put more of their money in U.S. banks.
Mexico's supply of pesos increases; demand for U.S. dollar increases.
3) Mexico's economy is booming and RGDP is rising quickly.
Mexico's supply of pesos increases; demand for U.S. dollar increases.
4) U.S. price level is rising relative to the Mexico's price level.
U.S. supply of dollars increases; demand for pesos increases.
5) To increase exportsMexico's central bank intervenes in the currency market.
Mexico's supply of pesos increases; demand for U.S. dollars increases.
(This makes Mexico's exports less expensive than U.S. products)
1) The U.S. purchases more goods and services from Mexico.
U.S. supply of dollars increases; demand for pesos increases.
2) Mexico citizens want to put more of their money in U.S. banks.
Mexico's supply of pesos increases; demand for U.S. dollar increases.
3) Mexico's economy is booming and RGDP is rising quickly.
Mexico's supply of pesos increases; demand for U.S. dollar increases.
4) U.S. price level is rising relative to the Mexico's price level.
U.S. supply of dollars increases; demand for pesos increases.
5) To increase exportsMexico's central bank intervenes in the currency market.
Mexico's supply of pesos increases; demand for U.S. dollars increases.
(This makes Mexico's exports less expensive than U.S. products)