Topic 6.3- 
         Effects of Changes in 
         Policies and Economic 
               Conditions on the 
               Foreign Exchange 
                            Market
 Copyright 
 ACDC Leadership 2019
    Foreign Exchange Shifters
 1. Changes in Tastes-
 Example: What happens to the value of dollars and 
 pounds if British tourists flock to the US?
 Demand for U.S. dollars increases. 
 Supply of British pounds increases.
   Pound-depreciates 
   Dollar-appreciates
 2. Changes in Relative Incomes-
 Example: What happens to the value of dollars and 
 pounds if incomes in the U.S. increase?
 U.S. buys more imports. Demand for pounds increases.
 Supply of dollars increases.
   Pound- appreciates
   Dollar- depreciates
 3. Changes in Relative Price Level-
 Example: What happens to the value of dollars and 
 pounds if US inflation rises relative to Britain?
 Americans want cheaper imports. Demand for pounds 
 increases.
 Supply of U.S. dollars increases.
     Pound- appreciates
     Dollar- depreciates
 4. Changes in Relative Interest Rates-
 Example: What happens to the value of dollars and 
 pounds if the US interest rate increases relative to Britain?
 British people want the higher rate of return in the US.
 British demand for US dollars increases.
 British supply more pounds. 
     Pound-depreciates
     Dollar- appreciates
 Copyright 
 ACDC Leadership 2019
  What will happen to the international value of the 
  Mexican Peso if there is high inflation in Mexico? 
                                          -The demand for 
                Pesos                     pesos will decrease 
                                          since Mexico's 
                                          trading partners will 
                                          not want to purchase 
                                          higher priced 
                                          Mexican products.
                                          -The supply will 
                                          increase as Mexicans 
                                          look to buy lower 
 Copyright The Peso DEPRECIATES           priced imports. 
 ACDC Leadership 2019
  What will happen to the international value of the 
   Mexican Peso if the interest rate in Mexico falls? 
                                          -The demand for 
                Pesos                     pesos will decrease 
                                          since people in other 
                                          countries will buy 
                                          fewer Mexican 
                                          financial assets.
                                          -The supply will 
                                          increase as Mexicans 
                                          buy more financial 
                                          assets in other 
 Copyright The Peso DEPRECIATES           countries. 
 ACDC Leadership 2019