Exchange rates and the foreign exchange market

Learning objectives

Define an exchange rate as the price of one currency in terms of another, distinguish appreciation from depreciation and convert prices between currencies

Explain that a currency is demanded by foreigners who want to buy that country's goods, services and assets and supplied by residents who want to buy foreign goods, services and assets

Draw a correctly labeled foreign exchange market graph and find the equilibrium exchange rate and quantity of currency traded

Analyze how changes in relative interest rates, relative inflation, relative incomes, tastes and expectations shift the demand for and supply of a currency and change the exchange rate

Predict the effect of expansionary or contractionary monetary and fiscal policy on a country's exchange rate through their effects on interest rates and income

Explain why the demand for one currency is the supply of the other and check that a prediction is consistent in both currencies' markets