FOREIGN EXCHANGE MARKET

-buying and selling of currency

-any transaction that occurs in the balance of payments necessitates foreign exchange

-the exchange rate is determined in the foreign currency markets

Changes in exchnage rates

-exchange rates are a function of the supply and demand for currency

-/\ supply of currency will \/ exchange rate

-\/ supply of currency will /\ echange rate

-/\ demand for curency will /\ exchange rate

-\/ demand for currency will \/ exchange rate

Appreciation and depreciation

-appreciation will happen when /\ exchange rate 

-depreciation will happen when \/ exchange rate

Exchange rate determinants

-consumer taste

-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 relativley more expencive 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 expencive thus increasing exports and reducing imports