Post on 25-Feb-2016
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Determinants of foreign exchange rates
1. Price level in Mexico increases
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
1. Price level in Mexico increases the dollar appreciates the peso depreciates
2. Interest rates in Mexico increase
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
2. Interest rates in Mexico increase the dollar depreciates the peso appreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
3. Interest rates in the US increase
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
3. Interest rates in the US increase the dollar appreciates the peso depreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
4. Mexico’s real GDP increases
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
4. Mexico’s real GDP increases the dollar appreciates the peso depreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
5. US government reduces taxes
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
5. US government reduces taxes the dollar depreciates the peso appreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
6. Americans increase their demand for Mexican tomatoes
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
6. Americans increase their demand for Mexican tomatoes the dollar depreciates the peso appreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
7. American investors feel the Mexican economy will grow
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
7. American investors feel the Mexican economy will grow the dollar depreciates the peso appreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
8. American investors feel the Mexican economy is unstable
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
8. American investors feel the Mexican economy is unstable the dollar appreciates the peso depreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
9. Mexican demand for US guns increases
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
9. Mexican demand for US guns increases the dollar appreciates the peso depreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
10. American demand for cocaine shipped through Mexico increases
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
10. American demand for cocaine shipped through Mexico increases the dollar depreciates the peso appreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
11. The US imposes a tariff on Mexican goods
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos
11. The US imposes a tariff on Mexican goods the dollar appreciates the peso depreciates
Quantity of Dollars Quantity of Pesos
Pes
o / d
olla
r exc
hang
e ra
te
Dol
lar /
Pes
os e
xcha
nge
rate
S
D D
S
The Market for Dollars The Market for Pesos