6.5 Changes in the Foreign Exchange Market and Net Exports

Explain (using graphs as appropriate) how changes in the value of a currency can lead to changes in a country’s net exports and aggregate demand.

• Factors that cause a currency to appreciate cause that country’s exports to decrease and its imports to increase. As a result, net exports will decrease.
• Factors that cause a currency to depreciate cause that country’s exports to increase and its imports to decrease. As a result, net exports will increase. [See EK MOD-2.A.3 and EK MOD-2.H.1 for explanations of the effect of changes in net exports on aggregate demand and the resulting effects on output, employment, and the price level.]
• Enduring understanding MKT-5: The interaction of buyers and sellers exchanging the currency of one country for the currency of another determines the equilibrium exchange rate in a flexible exchange market and influences the flow of goods, services, and financial capital between countries.