AP Macroeconomics 6.3: The Foreign Exchange Market
Explain how demand and supply for a currency relate to its exchange rate and identify the direction of currency-market changes.
- Syllabus
- Effective Fall 2025
- Course
- AP Macroeconomics
Covered syllabus points
MKT-5.B—a. Define the foreign exchange market, demand for currency, and supply of currency. b. Explain (using graphs as appropriate) the…MKT-5.C—Define (using graphs as appropriate) the equilibrium exchange rateMKT-5.D—Explain (using graphs as appropriate) how exchange rates adjust to restore equilibrium in the foreign exchange market
6.3 The Foreign Exchange Market question 1
[Maximum number: 2]
Exchange rates and interest rates are important for macroeconomic decision making.
Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following.
Supply of euros. Explain.
(b) 3 points:
•
One point is earned for drawing a correctly labeled graph of the foreign exchange market for the euro.
•
One point is earned for showing that the supply curve for euros shifts to the right and for
concluding that the yen price of the euro decreases.
•
One point is earned for explaining that the European purchases of Japanese financial assets will
increase due to the relatively higher rate of return in Japan.
6.3 The Foreign Exchange Market question 2
[Maximum number: 1]
Under a flexible exchange-rate system, the exchange rate between two countries' currencies is determined by the
A
amount of gold reserves held by the central bank in each country
B
gross domestic product of the exporting country
C
demand for and supply of each country's cur rency
D
amount of resources available to the importing country
E
real interest rate in the exporting country
C
6.3 The Foreign Exchange Market question 3
[Maximum number: 1]
The United States and the United Kingdom are trad ing partners with flexible exchange rates. The cur rency of the United States is the dollar ($), and the currency of the United Kingdom is the pound (£). The graph provided shows the foreign exchange market for the pound. At an exchange rate of $2 per pound, which of the following will occur?
A
There will be excess supply of the dollar.
B
There will be excess demand for the pound.
C
The pound will appreciate.
D
The dollar will appreciate.
E
A £2 souvenir in Britain will cost $1 for United States tourists.
D
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