Macroeconomics
● NationalIncomeLevel: Ahighernationalincomeincreasesthedemandforacountry’sproducts and currencyandviceversa. Forexample,aneconomicboomintheU.S.increasesthedemand for its goods, services, and currency.
An increase in the demand for a currency increases its value, causing it to appreciate. For example, if $1 =€0.93,andoneof the previous factors causes the demand for the U.S. dollar to increase, ceterisparibus ,theU.S.dollarwillappreciate,suchthat $1 may be worth more Euros, for instance, €1.05. Conversely, when the demand for a currency decreases, ceteris paribus , it depreciates.
Itiscrucialtounderstandthatachangeinthedemandforacurrencyrelativetoanotheroneaffects the supplyoftheothercurrency. Whenpeoplewanttoexchangetheircurrencyforanotherone,they willneedtosupplytheircurrencytobuytheforeigncurrency. Forexample,whenthedemandfortheUSD by Europeans increases, the supply of the Euro also increases. F. Supply of Foreign Exchange The supply of a currency refers to the total amount of the currency made available in the foreign exchange market. Unlike the demand for a currency, the supply of acurrencyisdirectlyrelatedtoits exchangerate,indicatingapositiverelationship.Whenacurrency,suchastheEuro,depreciatesagainst the USD (USD strengthens), it becomes cheaper for foreigners, such as Americans, to buy Euro and European goods and services. As a result, more U.S. dollars are supplied to exchange them for Euros. Graphically,thisisreflectedbyanupward-slopingcurrencysupplycurve.Forinstance,whenthepriceof the U.S. dollarintermsoftheEuroincreases,thesupplyoftheU.S.dollarincreasestoexchangeitfor Euros to purchase cheaper European goods and services. Similar to thedemandcurveofacurrency,thecurrencysupplycurveshiftstotherightwhencurrency supply increases and to the left when currency supply decreases.
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