|Posted on April 18, 2014 at 10:55 AM|
The international value of currency will depreciate (decrease in value relative to another currency) due to the following factors:
1. Interest rates decrease - Foreigners will demand fewer bonds when interest rates fall (because foreigners will make less money off our interest-bearing assets).
2. Tastes and preferences for goods decrease - If foreigners demand fewer products produced over here, then the currency will depreciate.
3. Inflation increases - If prices are relatively higher over here than overseas, then foreigners will not want our goods and we will want cheaper goods overseas.
4. Incomes increase - If this economy is strong and foreign economies are weak, foreign economies cannot afford our goods. However, we can afford to purchase foreign goods.
AP Macroeconomics Unit 6 International Trade