Principles of Macroeconomics / Unit 13 MAC 1213 worked example, 60 to 90 seconds
Which Way Does the Currency Move
The idea
From an event, name which curve or curves shift, in which direction, and what happens to the rate. Work in one currency's market and keep it fixed. The three shifters run fastest to slowest: expectations, then relative returns, then relative inflation.
In practice
Domestic interest rates rise relative to abroad. Foreign investors want domestic assets, so demand rises; domestic investors keep funds home, so supply falls. Both shifts push the same way and the currency appreciates. Now domestic inflation runs above the partner's for several years. The currency buys less, demand falls and supply rises, and it depreciates. Now traders come to expect a depreciation next month. Demand falls and supply rises at once, and the depreciation happens now rather than next month.
Where people slip
In this market the two curves often shift together rather than one at a time, which is unlike unit two's goods markets. When both shift the same way, the direction of the rate is certain and the quantity traded is not. Say so rather than guessing at the quantity.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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