Question 1

What is the foreign exchange market?

Accepted Answer

The market where one currency is exchanged for another

Question 2

What causes the demand for a currency in the foreign exchange market?

Accepted Answer

Demand for a country’s goods, services, and financial assets

Question 3

What causes the supply of a currency in the foreign exchange market?

Accepted Answer

Making payments in other currencies

(if Britain wants to import Japanese goods, it must convert British Pounds to Japanese Yen, which means it must sell Pounds, increasing the supply of Pounds and decreasing the supply of Yen)

Question 4

When is equilibrium achieved in the foreign exchange market?

Accepted Answer

Equilibrium is achieved when the exchange rate is such that the quantities demanded and supplied of the currency are equal

Question 5

What happens when there is a disequilibrium exchange rate?

Accepted Answer

Disequilibrium exchange rates create surpluses and shortages in the foreign exchange market

Market forces drive exchange rates toward equilibrium

Question 6

What is the relationship between exchange rate and quantity demanded for a currency?

Accepted Answer

Inverse: if a currency has a higher exchange rate (is more expensive), quantity demanded for the currency falls

Question 7

What is the relationship between exchange rate and quantity supplied for a currency?

Accepted Answer

Positive: if a currency has a higher exchange rate (is more expensive), quantity supplied for the currency rises

6.3 The Foreign Exchange Market, AP Macroeconomics Flashcards