AP Macroeconomics AMSCO Guided Notes
6.3: The Foreign Exchange Market
AP Macroeconomics Guided Notes
AMSCO 6.3 - The Foreign Exchange Market
Essential Questions
- What role do supply and demand play in the foreign exchange market and the equilibrium exchange rate?
I. The Foreign Exchange Market
1. What is the foreign exchange market and what types of participants operate within it?
2. Why are currencies always traded in pairs on the forex?
3. How do supply and demand determine exchange rates in the foreign exchange market?
II. The Equilibrium Exchange Rate
A. Understanding Equilibrium
1. What is the equilibrium exchange rate and how does it relate to supply and demand?
2. How does a country's demand for imported goods affect the supply of its currency in the forex?
B. How Exchange Rates Affect Trade
1. Why does the demand curve for a currency slope downward as that currency appreciates?
2. How does currency depreciation affect a country's export prices and foreign demand for its goods?
C. Disequilibrium and Balance of Payments
1. What is disequilibrium in the foreign exchange market and what causes it?
2. How does the foreign exchange market naturally push exchange rates back toward equilibrium?
3. Why is it impossible for two currencies to appreciate against each other simultaneously?
D. Currency Supply and Demand
1. What factors create demand for a country's currency in the foreign exchange market?
2. How does an increase in a country's exports affect the demand curve for its currency and its exchange rate?
3. When one currency appreciates against another, what happens to the other currency and why?
Key Terms
foreign exchange market
exchange rate
equilibrium exchange rate
supply of currency
demand curve
supply curve
disequilibrium
demand for currency