Chapter 13: Foreign Exchange and International Trade of Money

Changes in tastes and preferences for a certain country's goods and services can change the demand for that country's currency

Assuming that foreign goods and services are normal (rather than inferior) goods, increases in people's incomes in one country can increase their demand for foreign goods and services

People's expectations about the future influence their demand for goods and services today

The rate at which one currency can be exchanged for another is called the exchange rate

Under a flexible or floating exchange rate system, the interaction of demand and supply determines the exchange rate for a given currency.

Some countries do not use a flexible exchange rate system and instead keep the rate of exchange between their currency and the currency of other countries at a fixed rate. This is called a fixed or pegged exchange rate system.

When the price of currency A rises relative to currency B, currency A has appreciated.

When the price of currency A falls relative to currency B, currency A has depreciated.