6.3

The Foreign Exchange Market

AP Macroeconomics

The forex market

Demand for a currency

Supply of a currency

Forex market equilibrium

12345678910123Quantity of DollarsPrice of $ (in foreign currency, e.g., €)EquilibriumD$S$

Forex market: supply and demand determine the exchange rate

What shifts the demand for a currency?

What shifts the supply of a currency?

Showing appreciation in the forex market

123456789101234Quantity of DollarsPrice of $ (in €)e₁e₂D$₁D$₂S$

Increase in demand for dollars → dollar appreciates (price rises)

Showing depreciation in the forex market

12345678910123Quantity of DollarsPrice of $ (in €)e₁e₂D$S$₁S$₂

Increase in supply of dollars → dollar depreciates (price falls)

Reciprocal markets

AP Exam Tips

  • •
  • •
  • •
  • •
  • •

Common Mistakes

  • •
  • •
  • •
  • •

Unit 6 topics

Unit 6 overview6.1Balance of Payments Accounts6.10Economic Integration and Trade Agreements6.2Exchange Rates6.3The Foreign Exchange Market6.4Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market6.5Changes in the Foreign Exchange Market and Net Exports6.6Real Interest Rates and International Capital Flows6.7The Effect of Trade Policies6.8Fiscal and Monetary Policies in Open Economies6.9Exchange Rate Regimes
← Previous6.2 Exchange RatesNext →6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Practice AP Macroeconomics questions →