The Foreign Currency Market. AP Annual Conference 2012 Orlando, Florida. Arthur Raymond Chief Reader, AP Macroeconomics Muhlenberg College Allentown, PA. The Foreign Currency Market. Proper Labeling of the Axes of the foreign currency market diagram
AP Annual Conference 2012
Chief Reader, AP Macroeconomics
The quantity of cars
The price of one car: $/1car
The quantity of Euros
The price of one Euro
If it’s the dollar-euro market, then it’s the number of dollars to buy one Euro, i.e., $1.25/1€
The quantity of dollars
The price of one dollar
If it’s the dollar-euro market, then it’s the number of Euros to buy one dollar, €/$, i.e., €0.80/ $1
Quantity of Yen
Euro per Yen, €/¥1, i.e,
In the foreign currency market, the vertical axis is the price of one unit of the currency on the horizontal axis.
Shifts of the Supply or Demand Curves for Currency Produce Appreciation or Depreciation of a Currency
(with floating exchange rates).
Sources of shifts in currency demand and supply curves
A decrease in the US Price level will decrease the demand for Japanese goods and services and increase the demand for US goods and services, so there will be a decrease in the demand for the Japanese Yen.
(From 2007 Macroeconomics Exam, Form B)
a) Assume that the real interest rate in the United States falls to 3.75 percent.
(ii) Using a correctly labeled graph of the foreign exchange market for the euro, show how the value of the euro would change relative to the United States dollar in a flexible exchange rate system.
(From 2012 AP Macroeconomics Exam)
(i) What will initially happen to the current account deficit in Rankinland solely due to the change in the real GDP from part (b)(iv) ? Explain.
(ii) What will happen to the international value of the bera solely due to the change in the real GDP from part (b)(iv) ? Explain.
(Real GDP Increases)