💸 Unit 1: Basic Economic Concepts
1.2Opportunity Cost and the Production Possibilities Curve (PPC)
1.3Comparative Advantage and Trade
📈 Unit 2: Economic Indicators and the Business Cycle
2.1Circular Flow and GDP
2.6Real vs Nominal GDP
💲 Unit 3: National Income and Price Determination
3.5Equilibrium in Aggregate Demand-Aggregate Supply (AD-AS) Model
💰 Unit 4: Financial Sector
4.3Definition, Measurement, and Functions of Money
4.4Banking and the Expansion of the Money Supply
⚖️ Unit 5: Long-Run Consequences of Stabilization Policies
5.1Fiscal and Monetary Policy Actions in the Short-Run
5.3Money Growth and Inflation
5.4Deficits and the National Debt
🏗 Unit 6: Open Economy-International Trade and Finance
6.1Balance of Payments Accounts
6.4Effect of Changes in Policies & Economic Conditions on the Foreign Exchange Market
⏱️ 1 min read
November 15, 2020
Foreign Exchange Demand
Foreign exchange demand is the quantity of an international currency that all domestic and foreign currencies are willing and able to purchase at various rates of exchange.
The relationship between exchange rates and the quantity of currency demanded is inverse:
💡As the exchange rate rises, domestic and foreign consumers will purchase less quantity of the currency.
💡As the exchange rate falls, domestic and foreign consumers will purchase more quantity of the currency.
Foreign Exchange Supply
Foreign exchange supply is the quantity of an international currency that all domestic and foreign sellers are willing and able to sell at various rates of exchange.
The relationship between exchange rates and quantity of currency supplied is positive or direct:
💡As exchange rates rise, domestic and foreign consumers are willing to sell more.
💡As exchange rates fall, domestic and foreign consumers are willing to sell less.
FOREX Market Equilibrium
Equilibrium is achieved in the FOREX Market (the market in which foreign currency is bought and sold) when the quantity supplied of the currency equals the quantity demanded of the currency at a specific exchange rate.
Let's draw the FOREX Market in Equilibrium for the EURO (💶) relative to the U.S. Dollar (💵):
Since in the FOREX market we are working with has flexible exchange rates, the exchange rates are constantly changing. When they rise above equilibrium or fall below equilibrium, the market will force them back up to equilibrium.
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