• <b>United States Federal Reserve</b>

Principles of Macroeconomics


Market for Currency


In this section, we discuss how currency exchange rates are determined by supply and demand for currency. We focus on a two-country graphical model. The demand for the domestic currency comes from the demand people from the foreign country have to make financial investments in the domestic country, or to buy products that are produced in the domestic country. Similarly, the demand for the foreign currency comes from the demand people in the domestic country have to make financial investments in the foreign country, or to buy products that are produced in the foreign country. Since people in one country must sell their own currency in order to buy a different currency, it will be the case that the supply of the domestic currency is the same thing as the demand for the foreign currency. Similarly, the supply of the foreign currency is the demand for the domestic currency. We will use the equilibrium model to show how exchange rates are determined, and what causes them to change.


[Download PDF]

Intro to Supply and Demand for Currency

Here we focus on the trade between U.S. dollars and Euros to derive the demand curve for U.S. dollars, which we show is identical to the supply curve for Euros. We discuss and illustrate how the quantity of currency demanded / quantity of currency supplied depends on the exchange rate. [Play Pencast]


[Download PDF]

Shifts in Supply and Demand for Currency

Here we discuss other factors (besides a change in exchange rate) that can influence the supply and demand for currencies. We show how changes in these factors shift the demand and supply curves, and what the consequences are on the exchange rate in equilibrium. [Play Pencast]


[Download PDF]

Effect of Interest Rates on Currency Markets

Here we discuss how changes in the relative interest rates in two countries affect the supply and demand for currency in each market. We then illustrate consequences for the equilibrium exchange rate. [Play Pencast]


Return to Principles of Macroeconomics Home