LOS d: Describe the factors that cause a nation's currency to appreciate or depreciate.

If a nation's trading partners prices are increasing twice as fast as the domestic country A, then foreign citizens will increase their demand for A's goods. This increased demand will appreciate country A's currency making country A's goods more expensive offsetting the effects of inflation.

The demand for imports would decrease due to their higher price because of the tariff. This would cause U.S. exports to increase relative to imports. When a country has increased exports relative to its imports, its currency will appreciate.

The Japanese automaker will need to buy U.S. dollars to pay for costs in the United States such as payments to workers, overhead costs, supplies and materials. Thus, the Japanese automaker will be looking to trade yen for dollars, creating a demand for dollars and a surplus of yen.

The three major factors that cause a country's currency to appreciate or depreciate relative to another's are:

• Differences in income growth among nations will cause nations with the highest income growth to demand more imported goods. Heightened demand for imports will increase demand for foreign currencies, and foreign currencies will appreciate relative to the domestic currency.
• Differences in inflation rates will cause the residents of the country with the highest inflation rate to demand more imported (cheaper) goods. If a country’s inflation rate is higher than its trading partner’s, the demand for the country’s currency will be low, and the currency will depreciate.
• Differences in real interest rates will cause a flow of capital into those countries with the highest available real rates of interest. Therefore, there will be an increased demand for those currencies, and they will appreciate relative to countries whose available real rate of return is low.

Rapid growth of U.S. incomes relative to incomes in Mexico will stimulate imports from Mexico, causing an increased demand for the peso. The increased demand for pesos will cause the peso to appreciate relative to the dollar.

An unanticipated shift to an expansionary monetary policy will lead to higher income, an accelerated inflation rate, and lower real interest rates. The higher income and higher domestic prices stimulate imports and discourage exports causing the current account balance to move toward deficit.

If a nation's trading partners prices are increasing twice as fast as the domestic country A, then foreign citizens will increase their demand for A's goods. This increased demand will cause country A's currency to appreciate making country A's goods more expensive offsetting the effects of inflation differences.

Lower income growth, lower inflation, and a higher domestic real interest rate are factors that should cause a currency to appreciate. Dacia is expected to have a lower income growth rate and a higher real interest rate than Epirus, so Dacia’s currency should appreciate relative to that of Epirus. Dacia is expected to have a lower inflation rate than Noricum, so Dacia’s currency should also appreciate against the currency of Noricum.

Three major factors cause a country’s currency to appreciate or depreciate:

1. The growth rate of income relative to trading partners (high growth → depreciation).
2. The rate of inflation relative to trading partners (high inflation → depreciation).
3. Domestic real interest rates relative to those of other countries (low real rates → depreciation).

By eliminating a high tariff on a major imported item under flexible exchange rates, demand for foreign goods increases, causing the peso to depreciate.

The main determinant of exchange rates is the supply and demand for a currency, which is determined by the difference between the two countries in their: income growth, inflation rates, and interest rates.

Demand for currency increases when real interest rates increase because of increased financial flows.

With inflation, consumers will have higher nominal expenditures including those on foreign goods. They will increase their demand for foreign goods, which will cause the domestic currency to depreciate.

From the given exchange rates, we determine that the Canadian Dollar has depreciated against the Australian Dollar (the CAD now buys less units of AUD). The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation in the long run. An unanticipated shift to a more expansionary fiscal policy will, however, in the short run (and we are told that the policy change was recent) lead to appreciation. The third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. The policy change is recent and there should have been recent appreciation if the government recently undertook an unanticipated expansionary fiscal policy action.

The other statements would most likely lead to currency depreciation (or demand for foreign currency). An unanticipated shift to expansionary monetary policy would lead to currency depreciation. The expansionary policy leads to higher economic growth, an accelerated inflation rate (increased demand for foreign goods), and lower real interest rates (the country’s assets are less attractive to foreigners). All these factors cause a nation’s currency to depreciate.

A decrease in the nation’s domestic rate of inflation means that the nation’s currency will tend to appreciate (or depreciate less rapidly) in value. Those outside the U.S. will trade their currency for dollars in order to take advantage of the relatively lower goods prices. This will cause an increase in the demand for dollars.

An expansionary monetary policy causes inflation, which reduces domestic purchasing power. In addition, inflation causes a currency to depreciate in value.

Slow growth of income relative to one's trading partners will cause imports to lag behind exports. When the demand for a country's exports increases, the demand for their currency also increases causing their currency to appreciate.

A country’s currency will appreciate after its exports rise in relation to its imports. An increase in exports means that other countries are buying the country’s currency, which increases its value.

The result is an increase in demand for the U.S. dollar and it will appreciate relative to countries whose available real rate of return is low. Thus, an increase in loanable funds will occur.

Consumers substituting one product for another influences demand, but this may not necessarily affect imports or exports. Factors affecting the appreciation or depreciation of a currency are: inflation rates, interest rates, income growth, and macroeconomic factors such as monetary and fiscal policies.

Demand for foreign currencies comes from demand for things produced by foreigners. For example, the demand for U.S. dollars on the foreign exchange market comes from non-Americans buying things from Americans. If U.S. imports decrease and exports increase, there is an increased demand for U.S. dollars because foreign countries are purchasing more goods from the U.S., thus appreciating the U.S. dollar.