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# lec24 - EXCHANGE RATES The price of one country's currency...

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3 EXCHANGE RATES The price of one country’s currency in terms of another country’s currency. Example: £ 1 costs \$2. \$1 costs £ 0.50 5 Exchange rate determines cost of imports and exports: US exports: fighter plane \$3 million = £ 1.5 million in Britain. US imports: British sweater £ 10 = \$20 in US. 8 Currency depreciates = price in terms of the other currency drops. One currency depreciates other currency appreciates Example: \$1 costs £ 0.33 (down from £ 0.50) Dollar depreciates relative to the pound. This is equivalent to: £ 1 costs \$3 (up from \$2) Pound appreciates relative to the dollar. 11 Depreciation of a country’s currency helps its exports and makes its imports more expensive. US Exports: Fighter jet \$3 million = £ 1 million (down from £ 1.5 million) US Imports: British sweater £ 10 = \$30 (up from \$20) 13 Depreciation of dollar helps US economy. Appreciation of dollar hurts US economy. 14 What determines exchange rate?

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18 Demand and supply of dollars: e \$ S \$ D \$ \$ * e* 20 US interest rate up. e \$ S \$ D \$ 1 e 1 D \$ 2 e 2 Upward shift in demand curve for dollars. 22 US interest rate down. e \$ S \$ 2 D \$ e 1 e 2 S \$ 1 Outward shift in supply curve for US dollars.
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