Macroeconomics
● CurrencyAppreciation: Thisoccurswhenthevalueofacurrencyincreasesintermsofanother. For example, if one U.S. dollar now buys 200 instead of 146 JPY, then the U.S. dollar has appreciated.ThisbeneftsAmericansifpricesinJapandonotchangeastheycannowpurchase more Japanese yen, and hence more goods and services from Japan, with each dollar. ● CurrencyDepreciation: Thisoccurswhenthevalueofacurrencydecreasesintermsofanother. For example, if one U.S. dollar now buys 100 instead of 146 JPY, then the U.S. dollar has depreciated. This harms American consumers who purchase goods and services from Japan because everything becomes more expensive. Itisimportanttonotethatwhenanalyzingchangesintheexchangerate, youmustpayattentiontothe units used. When one currency becomes more valuable in terms oftheother,itissaidtoappreciate. Alternatively, when it becomes less valuable in terms of the other, it is said to depreciate. Study Tip It is wrong to assume that currency appreciation is always benefcial. When a trading country’s currencyincreasesinvalue,thepricecompetitivenessofitsdomesticgoodsandservicesdecreases because they become more expensive for foreigners,whowillneedmoreunitsoftheircurrencyto purchase each unit of the domestic currency. E. Demand for Foreign Exchange The foreignexchangemarketissimilartoanyothermarketwe’veseensofar,involvingthebuyingand sellingofsomething.However,inthismarket,it'snotagoodorservicebeingexchanged,butacurrency, and the price of this currency is stated in terms of another. The demandforacurrencyisthewillingnesstopurchaseacurrencybasedonitsexchangeratewhich represents its price. The quantity demanded of a currency is inversely related to its exchange rate, indicating a negative relationship.Thisisduetothefactthatasacurrencyincreasesinvalue(i.e.,appreciatesoritsexchange rateincreases),thedemandforitdropsbecauseitbecomesmoreexpensive,alsomakingthecountry’s goodsandservicesmoreexpensiveforforeigners.Alternatively,whenacurrency’svaluedecreases(i.e., depreciates or its exchange rate decreases), it becomes cheaper for foreigners, makingthedomestic country’s goods and services more price competitive internationally. Graphically, this is reflected by a downward-sloping demand curve on a diagram where the quantity demandedofthestudiedcurrencyisplottedonthehorizontalaxisandtheexchangerate(i.e.,price)in terms of another currency is plotted on the vertical axis. Forexample,wecanrepresentthedemandfortheU.S.dollarintheforeignexchangemarketbyplotting thequantityofU.S.dollarsonthehorizontalaxis,andtheEurosdenotedby€(oranyothercurrency)per dollar on the vertical axis as follows:
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