exchange

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