Exchange Rate is the price at which currencies Trade for one another in the market.
Euro is the common currency in Europe.
A depreciation of a currency is a decrease in the value of a currency relative to the currency of another nation.
If the dollar appreciates against the yen, the yen must depreciate against the dollar. You’ll get more yen in exchange for the dollar, but now when you trade your yen back, you’ll get fewer dollars.
The exchange rate between U.S dollars and euros is determined in the foreign-exchange market.
The exchange rate between U.S. dollars and euros is determined in th foreign-exchange market, the market in which dollars trade for euros.
The supply curve is the quantity supplied of dollars in exchange for euros.
The demand curve represents the quantity demanded of dollars in exchange for euros.
Equilibrium in the market for foreign exchange occurs where the demand curve intersects the supply curve.
Changes in demand and supply will change equilibrium exchange rates.
The causes of shifts of the demand curve for dollars is the higher U.S interest rates will lead to an increased demand for dollars to invest in U.S assets and the lower U.S prices will lead to increased demand for dollars.
Prices change over time, so we need to adjust the exchange rate determined in the foreign exchange market to take into account changes in prices, which is an application called real-nominal principle.
Real-Nominal Principle is what matters to people is the real value of money or income-its purchasing power-to the face value of money income.
Real Exchange Rate is the price of U.S. goods and services relative to foreign goods and services, expressed in common currency. The formula is expressed as:
An increase in U.S prices will raise the real exchange rate.
An appreciation of the dollar when prices are held constant will increase the price of U.S goods relatively more expensive as well.
Real exchange rate takes into account changes in a country's prices over time because of inflation.
Multilateral Real Exchange Rate is based on an average of real exchange rates with all U.S trading partners.
Law of One Price is the theory that goods easily tradable across countries should sell at the same price expressed in a common currency.
Purchasing Power Parity is the theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.
A foreign exchange market intervention is the purchase or sale of currencies by the government to influence the market exchange rate.
To influence the price at which one currency trades for another, governments have to affect the demand or supply for their currency.
To increase the value of its currency, a government must increase the currency’s demand.
To decrease the values of its currency, the government must increase its supply.
A flexible exchange rate system is a currency system in which exchange rates are determined by free markets.
A fixed-rate system is a system in which governments peg exchange rates to prevent their currencies from fluctuating.
A balance of payments deficit is under a fixed exchange rate system, a situation in which the supply of a country’s currency exceeds the demand for the currency at the current exchange rate.
A balance of payments surplus is under a fixed exchange rate system, a situation in which the demand of a country’s currency exceeds the supply for the currency at the current exchange rate.
A devaluation is a decrease in the exchange rate to which a currency is pegged under a fixed exchange rate system.
A revaluation is an increase in the exchange rate in which a currency is pegged under a fixed exchange rate system.
As long as the differences in inflation continued and the exchange rate remained fixed, the U.S real exchange rate would continue to appreciate, and the U.S. trade deficit would grow even worse.