The Foreign Exchange Market- Macro 6.3

The Foreign Exchange Market- Macro 6.3

hi – Clifford its ac/dc calm we're talking about key concept that you actually have to know it's called foreign exchange in this video to explain the idea of supply and demand for different currencies right and then I talked about the shifters in the next video I want to do is I want you to practice okay figuring out which country's currency appreciates with when depreciate right now it's got two different currencies right this is not products this is currencies right supply and demand for dollar supply man for Canadian dollars alright so US dollars Canadian dollars over here we got to figure out what's the price of an American dollar well it's how many Canadian dollars you get for each US dollars and so it's always the other currency only currency that you're analyzing right we're looking at US dollars this is the quantity of US dollars well it's good old-fashioned demand and supply that gets the exchange rate the exchange rate is how many canadian dollars you get for each american dollar in this status start off let's say it's a one-to-one relationship you get one canadian dollar for one US dollar and there's obviously some sort of quantity out here available for people to exchange their currencies on the other side we've analyzed the canadian dollar so up here it's going to be the US dollar divided by the canadian dollar the valley of the canadian dollars how many US dollars you get for it down here is the quantity of canadian dollars available in the foreign exchange market here the demand here's a supply exchange rate what's going to be one to one relationship that's the idea okay now before we go any further we have to figure out who is demanding and who is supplying or analyzing dollars who is the ones that demanding the United States dollars don't say Americans right Americans don't demand our dollars we're supplying right the demand is determined by Canadians right who supplying wells were supplies by the US you got to keep that straight that can help you out later on now over here who demands Canadian dollars before exchange well Americans this is by Americans and Canadians are the ones who are supplying now before we shift this thing let's talk about the four things that will shift right the four shifters of foreign exchange all right here they are the first line is tastes and preferences another one is price level inflation the next one is going to be income the last one is interest rates and that's what we're going to use for this example okay let's focus on interest rates let's say that in the United States right the interest rate is 15 percent right and in Canada the interest rate is 2 percent so let's think about what a Canadians Americans going to do the Canadians are going to take their dollars convert them into American dollars and then turn around and buy American bonds and get that 15 percent return right the demand is going to increase for American dollars why well because Canadians want more if the Canadians want these they've got to supply their Canadian dollars right they've got to go to the foreign exchange and supply those so when they supply them that lead to an increase in supply of Canadian dollars and that ends up being a new location right here and here let's say the situation of being a two-to-one what does this have to be it has to be one to two right what's happening I states dollar did it appreciate or depreciate well it appreciated appreciation is when the currency gets stronger or now you get two Canadian dollars for each one American dollar so the United States dollar appreciated relative to the Canadian dollar what happened the Canadian dollar well it depreciated now you need two Canadian dollars to get one American dollar right now I'm going to give you a rule here like demand and supply always increase or decrease together if one country wants another country's currency they've got to supply more of their currency to do it quick bonus round that's one way to analyze it member I told you was that Canadians are going to want more American dollars because they want to get that higher interest rate they want to get that return of 15% compared to 2% they get their own country there's also something else going on here right normally the United States would turn around and go buy oak Americans with buy a certain number of maybe in assets but when we have a higher interest rate are they going to do that anymore the answer is no and so it also would happen in this situation is the demand would fall for Canadian dollars right the Americans would prefer not to have Canadian dollars they'd rather have American dollars but because they get a higher interest rate United States is demanding less Canadian dollars and they will be supplying less US dollars in the foreign exchange right now you're thinking like whoa well which one is it well it depends on what the questions asking if the question asks you well what happens to the demand when the interest rates higher the United States will demand would go up what happened to supply well supply would go down the plane is no matter how you draw this thing's United States dollar is definitely going to appreciate no matter what happens Canadian dollar is definitely going to depreciate okay hopefully this makes sense now it's time to practice okay good luck until next time

22 thoughts on “The Foreign Exchange Market- Macro 6.3

  1. I never knew I'd be able to still make profits after losing so much trading on my own not until I came across Mr Stephan Briggs, with his unique winning strategy i was able to recover my losses.

  2. I understand the general concepts but am a little confused with overall effect of changes in price level and changes in consumer taste.

    If we have two countries (A and B) and the price level in country A falls, leading to increase in demand for currency A, leading to an appreciation in currency A, I understand this causes net exports and AD to fall – but what about the effects of the initial price level fall? Won't these still have the effect of boosting exports? Could the boost in exports from lower price level outweigh the exchange rate appreciation effects?

    Similarly for changes in consumer taste, if consumer taste shifts towards country A goods/services, I understand this causes appreciation and NX/AD fall – but won't the shift in taste towards country A goods/services cause exports to increase?

    Ie what is the overall effect on AD? The price level falling and consumer tastes shifting towards a country's goods and services indicates to me that NX and AD would increase (before consideration of exchange rate effects). If asked in an essay, is it best to explain what happens to E.R but say the overall effect on AD is uncertain?

  3. Thanks so much for your work Mr. Clifford, the entirety of our economics class really appreciate it. Keep up the good work!

  4. This is a great video. I am using it in my own website about this topic here:

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  6. This was really easy . Thank you. I just understand now what my professor say in class for last 2 months 😀

  7. thank you Sir for explanation,this is the best video bout Forex i have watched , steel dont undrestand how does the forex work but i guess i will watche it again .


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  10. Using the example in this video. Wouldnt there also be an increase in the demand for CAD because Americans can borrow it at such a low rate? Or no? because they would still have to exchange it back to USD. If the spread between the two rates is so high, I think that the cost of changing CAD back to USD would still be less than paying 15% interest on a loan. Meaning there would still be an increasing demand for CAD. ……..Am I way off in this thinking?

  11. quick question… if CAD deppreciate wont hat make Canadian exports cheaper thus increasing demand for CAD..

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