AP Macroeconomics / Unit 6: Open Economy: International Trade and Finance
6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Notes
Factors that change exchange rates: relative interest rates, relative incomes, relative price levels, tastes.
- Higher US interest rates → more foreign demand for US assets → dollar appreciates.
Practice
The US raises interest rates relative to other countries. The dollar:
Capital flows in.
Higher inflation in the US relative to Japan tends to make the dollar:
US goods become less attractive.
Rising incomes in Europe increase demand for US goods. The dollar:
More demand for dollars.
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