EXCHANGE RATE ACTIVITY Factors affecting exchange rates AP Macro

Foreign Exchange Market Simulation http://www.fte.org/teacher-resources/lesson- plans/efllessons/foreign-currencies-and-foreign- exchange/ ______________________________________

Exchange rates Supply Supply E1 E1 Riyals/Classroom Bucks Federal Reserve Bank of Atlanta Exchange rates Supply Supply E1 E1 Riyals/Classroom Bucks Classroom Bucks/Riyals Demand Demand Q1 Quantity of Riyals Q1 Quantity of Classroom Bucks

Exchange rates Supply Supply S2 Classroom Bucks/Riyals E2 E1 E1 Federal Reserve Bank of Atlanta Exchange rates Supply Supply S2 Classroom Bucks/Riyals E2 E1 E1 Riyals/Classroom Bucks D2 E2 Demand Demand Q1 Q2 Quantity of Riyals Q1 Q2 Quantity of Classroom Bucks

Federal Reserve Bank of Atlanta Exchange rates Major factors that cause currencies to appreciate or depreciate relative to each other Inflation rates: consumers will increase demand for imports when their nation’s price level is higher relative to another nation’s. Real interest rates: financial capital will flow into nations with a higher real rate of interest relative to the real rate of interest in their nation. Income growth: nations with higher income growth will increase their demand for imported goods from nations with lower income growth Changes in consumer preferences: higher demand for another nation’s goods and or services will increase the demand for imports. These factors will increase the demand and supply of foreign currencies in the Foreign Exchange Market (FOREX) leading to the appreciation and depreciation of the currencies being exchanged.

Instructions for Activity 53 from the AP Macroeconomics Workbook: Get in pairs Assign one of the questions 10-12 for your pair to work. Draw the two currency graphs on the chart paper and shift the curve based on the scenario presented in the question. Discuss your rationale for the shifts. Write your answer on the chart paper. Have three sets of pairs volunteer to share their answer with the group.

Instructions for the 2010 Free Response Question #3: Get in pairs Answer question only parts c and d for #3 on your slate. 3. Have one pair volunteer to share their answer with the group.