Macroeconomics Unit VII: Currency

CURRENCY

Appreciation

• each dollar gets you more of the other currency 
• more of foreign currency is needed to buy each dollar 
• U.S. exports get more expensive for foreigners 
• U.S imports gets cheaper for us
• exports decrease
• imports increase
• GDP decreases 
• demand for U.S dollar will increase
• supply of U.S. dollar will decrease

Depreciation

• each dollar gets you less of the other currency
• exports increase
• imports decrease
• GDP increases
• U.S. exports gets cheaper for foreigners to buy
• U.S. imports gets more expensive for the U.S. 
• demand for the U.S dollar will decrease
• supply for the U.S dollar will increase

Supply of Money Comes From

• U.S. citizens
• banks
• industries wanting to make foreign purchases
• investments
• assets
• making transfer payments to foreigners

Demand of Money Comes From

• foreigners
• banks 
• industries wanting to purchase our goods
• investments
• assets
• making transfer payment to U.S.

Purchasing Power Parity

• when currency rates are set by international markets, changes will be based on actual purchasing power of currencies

Why We Exchange Currency

1. sell exports by imports
2. invest in another country's stocks/bonds
3. build stores other countries or factories
4. to speculate on currency values
5. hold currencies in bank accounts for future exports, imports, and business loans
6. to control excessive imbalances (the Federal Reserve Bank controls imbalances via balance of payments)