6.3: The Foreign Exchange Market

Who demands dollars

Foreigners that want the currency (supply their own currency for it)

Demand for dollars

Inverse relationship between the exchange rate (price) and quantity demanded

Who supplies dollars

Americnas

supply of dollars

Direct/positive relationship between the exchange rate (price) and quantity supplied

shortage

cause exchange rates to rise

surplus

cause exchange rates to fall

FOREX

if you demand one currency you must supply your own currency

FOREX shifters

1. Change in tastes

2. Change in relative incomes

3. Change in relative price level

4. change in relative interest rates

Fixed exchange rate

exchange rate set by the government and does not change

floating exchange rate

an exchange rate determined by supply and demand in FOREX