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Exchange rate market for mexican peso reacts to expectations about future exchange rates

The graph shows how supply and demand would change if the exchange rate for pesos was predicted to strengthen.
An announcement that the peso exchange rate is likely to strengthen in the future will lead to greater demand for the peso in the present from investors who wish to benefit from the appreciation. Similarly, it will make investors less likely to supply pesos to the foreign exchange market. Both the shift of demand to the right and the shift of supply to the left cause an immediate appreciation in the exchange rate.

[link] also illustrates some peculiar traits of supply and demand diagrams in the foreign exchange market. In contrast to all the other cases of supply and demand you have considered, in the foreign exchange market    , supply and demand typically both move at the same time. Groups of participants in the foreign exchange market like firms and investors include some who are buyers and some who are sellers. An expectation of a future shift in the exchange rate affects both buyers and sellers—that is, it affects both demand and supply for a currency.

The shifts in demand and supply curves both cause the exchange rate to shift in the same direction; in this example, they both make the peso exchange rate stronger. However, the shifts in demand and supply work in opposing directions on the quantity traded. In this example, the rising demand for pesos is causing the quantity to rise while the falling supply of pesos is causing quantity to fall. In this specific example, the result is a higher quantity. But in other cases, the result could be that quantity remains unchanged or declines.

This example also helps to explain why exchange rates often move quite substantially in a short period of a few weeks or months. When investors expect a country’s currency to strengthen in the future, they buy the currency and cause it to appreciate immediately. The appreciation of the currency can lead other investors to believe that future appreciation is likely—and thus lead to even further appreciation. Similarly, a fear that a currency might weaken quickly leads to an actual weakening of the currency, which often reinforces the belief that the currency is going to weaken further. Thus, beliefs about the future path of exchange rates can be self-reinforcing, at least for a time, and a large share of the trading in foreign exchange markets involves dealers trying to outguess each other on what direction exchange rates will move next.

Differences across countries in rates of return

The motivation for investment, whether domestic or foreign, is to earn a return. If rates of return in a country look relatively high, then that country will tend to attract funds from abroad. Conversely, if rates of return in a country look relatively low, then funds will tend to flee to other economies. Changes in the expected rate of return will shift demand and supply for a currency. For example, imagine that interest rates rise in the United States as compared with Mexico. Thus, financial investments in the United States promise a higher return than they previously did. As a result, more investors will demand U.S. dollars so that they can buy interest-bearing assets and fewer investors will be willing to supply U.S. dollars to foreign exchange markets. Demand for the U.S. dollar will shift to the right, from D 0 to D 1 , and supply will shift to the left, from S 0 to S 1 , as shown in [link] . The new equilibrium (E 1 ), will occur at an exchange rate of nine pesos/dollar and the same quantity of $8.5 billion. Thus, a higher interest rate or rate of return relative to other countries leads a nation’s currency to appreciate or strengthen, and a lower interest rate relative to other countries leads a nation’s currency to depreciate or weaken. Since a nation’s central bank can use monetary policy to affect its interest rates, a central bank can also cause changes in exchange rates—a connection that will be discussed in more detail later in this chapter.

Questions & Answers

this means that the demand curve have negative relationship with the price ..which means that when high price low demand of the product and vice versa so higher price will shirnk the demand of product
Ahsan Reply
Higher price level ∴Real value of household wealth increase ∴Net export decrease ∴More money needed, interest rate increase, investment decrease
sirius
a person has 60birr to buy two commodities,x and y the price of x is four birr unit the price of y is two birr unit his utility functio given by u=xy+2x determine the budget equation
Mohammed Reply
What are the various reasons for the Federal Reserve to increase the fed rates?
AMEEN Reply
What is unemployment
Mijash Reply
Unemployment is a term used to describe people who do not hold a paying job
JASON
what are the causes of unemployment
evans
unemployment refer to the situation in which people searching job but they have no. it also refers in which marginal productivity in zero.
Ramu
Causes of unemployment are: 1: Over Population 2: Break down of the family system 3: Rural/Urban Migration
Umar
unemployment simply means, in the situation where by people are looking for a job and their could achieve it.
Faruk
suppose you're the economist of ethiopia; when the country is face high rate of inflation what you recommend as one economist?
Roba Reply
if consumer spend all their incomes on consumption what does it mean?
Roba
if the government spends more of its revenue on development infrastructure from the budget it have and lower tax collection the budget deficit will run why?
Roba
because tax is less than revenue
Bhat
what is demand
Sunday Reply
Demand is the quantity of goods and services that consumers are willing and able to purchase at various prices over a given period of time
adu
demand is the ability back the willingness to purchase something with a specific price within a period of time
Ousman
the total value of goods and services produced by a coutry in it's own territorial area( mainly in a year) is called GDP
fareeha Reply
GDP- the total value of goods produced and services provided in a country during one year.
fareeha
What is the formula for propensity to save
Zubair
there is no formula for propensity to save but it has a two types one is average propensity to save and marginal propensity to save where Apc is equal to saving divide by income and mpc is equal to change in saving due change in income
Bhat
yes ooo
Sunday
yes
Ahmed
okay
kawu
what is time in economics?
Sunday
what is gross domestic product
Moonga Reply
what is macroeconomics
Dickison Reply
this is the branch of economics that deals with wide range
Ousman
what is macroeconomics
Majid Reply
what is macroeconomic analysis
Deogratius Reply
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment Read m
wasay
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment
wasay
what is wage in economics?
Sunday
what is economic
Wajeed Reply
Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. 
ninad
Economics is the brench of science that deals with the study of human behavior as it related to end or scare means which have alternative used.
Jimmy
Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses
Don
Economics as a social science does not have a definite definition, because it has been defined by many economist the most appropriate one was the one defined by Lord Lionel Robbin in 1932. He defined economics as a social science which study human behavior as a relationship between end and scare m..
Ernest
what is inflation
Junaid Reply
Inflation is simply a situation in an economy where there is a persistent rise or increase in the prices of goods and services in a particular year(say current year)
JERRY
It can still be defined as a situation in an economy where there's a persistent fall in the value of money
JERRY
it is the persistent rise in the general price of goods and services in an economy leading to the fall in the values of money
Muafue
It could mean the central bank has a deficit in reserve unable to cope with low export and exit of foreign investments.
Wong
inflation is the general increase in a commodity with in a country.
Jimmy
Mr Fallah please take the definition again that one is not clear
Muafue
the persistence in general price of commodities
ezechy
The persistence rise in the general price level
Muafue
The persistence rise in general price of commodities
Delhill
Inflation is the persistent increase in price of goods and services over a given period of time.
Ernest
what is willingness
Bilal Reply
Is a person Able,Capable and Anxious to something
Muafue
Is when a person is able,capable and Anxious to do something
Muafue
thanks sir g.
Bilal
u are welcome
Muafue
where you from
Bilal
Cameroon
Muafue
And you
Muafue
Pakistan
Bilal
How far are you in Education
Muafue
who about my question What is MPC
sabawoon
is marginal propensity to consume
Muafue
a little more
sabawoon
sorry muafue sir you are little bit wrong about willingness *willingness reffers how much wants . it could be wants for payment or wants for something to do.
Masadaq
MPC reffers *How much want to consume*.
Masadaq
MPC is Marginal Propensity to Consume. MPC is proportion of additional spent on consumption.
Bon
MPC is Marginal Propensity to Consume. MPC is the proportion of additional income spent on consumption.
Bon
What is difference between GNP and GDP?
Zahid
GNP is gross national product. In calculating GNP we include net national income from abroad while GDP is gross domestic product and in calculating it we use on expenditure, income and output from within the country. My name is JERRY NGONDA from Cameron
JERRY
GNP.the total value of good $service currently produce w a given period of time by domestic owner GNP=NFI+GDP:GDP is a market value of final good $service currently produce in a given period of time w in a country boundery or territors.its take produce currently $etc
tade
yes.no suggestions
tade
good Tade Feyera
Masadaq
Tade Feyera can you send me your whatsap contact number.
Masadaq
when spending by the federal government exceeds net taxes?
stefany Reply
explain the difference between macroeconomics and microeconomics
Rahmo
Macroeconomics is the study of economics at the aggregate level while Micro is at the individual level.
Umar
Both indifference curve and isoquant do not intersect TRUE OR FALSE and justify your statement
John
what is long run and short run period
Kennedy

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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