The Foreign Exchange Market- Macro 6.3 [MUSIC PLAYING] - Hey! How are you doing? I'm Mr. Clifford. It's ACDC Econ. We're talking about a key concept that you absolutely have to know-- it's call foreign exchange. In this video, I'm going to explain the idea of supply and demand for different currencies, and then I'm going to talk about the shifters. In the next video, what I want you to do, is I want you to practice, OK, figuring out which country's currency appreciates, which one depreciates. Right now, we've got two different currencies, right. This is not products, this is currencies, right? Supply and demand for dollars, supply and demand for Canadian dollars. All right. So US dollars, Canadian dollars. Over here, we've got to figure out what's the price of an American dollar. Well, it's how many Canadian dollars you get for US dollars. And so it's always the other currency over the currency that you're analyzing, right. We're looking at US dollars. This is the quantity of US dollars. Well it's good old fashioned demand and supply. That gets the exchange rate. The exchange rate is how many Canadian dollars you get for each American dollar. And let's say, to start off, let's say it's a one to one relationship. You get one Canadian dollar for one US dollar. And there's obviously some sort of quantity out here available for people to exchange their currencies. On the other side, we're going to analyze the Canadian dollar. So up here, it's going to be the US dollar divided by the Canadian dollar. The value of the Canadian dollar is how many US dollars you get for it. Down here is the quantity of Canadian dollars available in the foreign exchange market. Here's the demand, here's the supply. Exchange rate-- what it's going to be-- one to one relationship. That's the idea. OK. Now before we go any further, we have to figure out who is demanding and who is supplying? When we're analyzing dollars, who is the one that's demanding United States dollars? Don't say Americans, right? Americans don't demand our dollars, we're supplying. The demand is determined by Canadians. Who's supplying? Well, we're supplying by the US. You've got to keep that straight because that's going to help you out later on. Now over here. Who demands Canadian dollars in the foreign exchange? Well, Americans. It says by Americans, and Canadians are the ones who are supplying. Now before we shift this thing, let's talk about the four things that will shift. Right, the four shifters of foreign exchange. All right. Here they are. The first one is tastes and preferences. Another one is price level or inflation. The next one is going to be income. The last one is interest rates. And that's what we're going to use for this example. OK, let's focus on interest rates. Let's say that, in the United States, the interest rate is 15%. And in Canada, the interest rate is 2%. So let's think about what are Canadians and Americans going to do? The Canadians going to take their dollars, convert them into American dollars, and then turn around an buy American bonds and get that 15% return, right. The demand is going to increase for American dollars. Why? Well, because Canadians want more of them. If the Canadian want these, they've got to supply their Canadian dollars, right? They've got to go to the foreign exchange and supply those. And so when they supply them, that leads to an increase to the supply of Canadian dollars, and that ends up being in a new location, right-- here and here. Let's say the situation had been two to one, what does this have to be? It has to be one to two. Right? What's happening to the United States dollar? Did it appreciate or depreciate? Well, it appreciated. Appreciation is when the currency gets stronger. Or now you get two Canadian dollars for each one American dollar. So the United Sates dollar appreciated relative to the Canadian dollar. What happened to the Canadian dollar? Well, it depreciated. Now you need two Canadian dollars to get one American Dollar, all right? Now I'm going to give you a rule, here. Demand and supply always increase or decrease together. If one country wants another country's currency, they've got to supply more of their currency to do it. [ENDS AT 3:54]