6.4

Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

AP Macroeconomics

The key mechanism

Fiscal policy effects

Expansionary fiscal policy (↑G or ↓T)

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

Expansionary fiscal policy → higher r → capital inflows → dollar appreciates

Contractionary fiscal policy (↓G or ↑T)

Monetary policy effects

Expansionary monetary policy (↑MS)

Contractionary monetary policy (↓MS)

Changes in economic conditions

Relative income changes

Relative inflation changes

Relative interest rate changes

Changes in tastes

Summary table

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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
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