|Posted on April 18, 2014 at 11:00 AM|
To graph a foreign exchange market, you need to two different currencies to compare. For example, the market for US dollars needs to show how much of a foreign currency is needed to buy 1 US dollar.
In the market for US dollars, the quantity of dollars goes on the x-axis. On the y-axis, you put the foreign currency price of the US dollar.
In the No Bull Review graph below, we see the market for US dollars and how many euros it takes to buy a US dollar. This graph is showing a rightward shift of demand for dollars. This causes the US dollar to appreciate relative to the euro (and the euro depreciates relative to the dollar). It now takes more euro to purchase 1 US dollar, and fewer US dollars to purchase 1 euro.
The value of a currency will appreciate when its demand shifts to the right or its supply shifts to the left. The value of a currency will depreciate when its demand shifts to the left or its supply shifts to the right.
AP Macroeconomics Unit 6 International Trade