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Topic 6.3- Effects of Changes in Policies and Economic Conditions on the Foreign Exchange Market Copyright ACDC Leadership 2019 Foreign Exchange Shifters 1. Changes in Tastes- Example: What happens to the value of dollars and pounds if British tourists flock to the US? Demand for U.S. dollars increases. Supply of British pounds increases. Pound-depreciates Dollar-appreciates 2. Changes in Relative Incomes- Example: What happens to the value of dollars and pounds if incomes in the U.S. increase? U.S. buys more imports. Demand for pounds increases. Supply of dollars increases. Pound- appreciates Dollar- depreciates 3. Changes in Relative Price Level- Example: What happens to the value of dollars and pounds if US inflation rises relative to Britain? Americans want cheaper imports. Demand for pounds increases. Supply of U.S. dollars increases. Pound- appreciates Dollar- depreciates 4. Changes in Relative Interest Rates- Example: What happens to the value of dollars and pounds if the US interest rate increases relative to Britain? British people want the higher rate of return in the US. British demand for US dollars increases. British supply more pounds. Pound-depreciates Dollar- appreciates Copyright ACDC Leadership 2019 What will happen to the international value of the Mexican Peso if there is high inflation in Mexico? -The demand for Pesos pesos will decrease since Mexico's trading partners will not want to purchase higher priced Mexican products. -The supply will increase as Mexicans look to buy lower Copyright The Peso DEPRECIATES priced imports. ACDC Leadership 2019 What will happen to the international value of the Mexican Peso if the interest rate in Mexico falls? -The demand for Pesos pesos will decrease since people in other countries will buy fewer Mexican financial assets. -The supply will increase as Mexicans buy more financial assets in other Copyright The Peso DEPRECIATES countries. ACDC Leadership 2019
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