all impact a countrys demand for imports. The first is the demand for a countrys exports. As a result, the game below only focuses on one shift at a time. When the exchange rate increases, the currency appreciates. This will cause the US dollar to appreciate while the Mexican Peso depreciates. Axes: The y axis on the foreign exchange market is the Exchange rate in Pesos, Pesos per Dollar, or my preference, Price of Dollars in Pesos. Some factors that influence the demand for a countrys exports include price levels (lower price levels, higher demand foreign national income (more foreign income, more demand and foreign consumers tastes and preferences. At the same time the demand of Mexican Pesos (in the market for pesos) will decrease as foreign investors will demand fewer pesos to invest in Mexico.
Determinants of Currency Demand : There are 3 determinants of demand for a currency (shifters). When the US dollar depreciates, US exports get cheaper for foreign entities and imports get more expensive. Every time someone exchanges dollars for pesos, they have simultaneously increased the supply of dollars and the demand for pesos. The x axis is the quantity of US Dollars.
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Higher US demand for imports means a higher supply of US Dollars in the foreign exchange markets. As a result, when the US Dollar appreciates relative to the Mexican Peso, the Mexican Peso depreciates relative to the US Dollar (and vice versa). The third determinant of supply is the expected future exchange rate. If you're behind a web filter, please make sure that the domains *.kastatic. This aspect can get a little complicated and the College Board has isolated shifts in the past.
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