[Mehwish]

Between deprecation and appreciation and how it affects foreign and domestic currency.

If US currency depreciates does that mean foreigner demand more of US goods?

When there is inflation, does the currency deapreiacte ? The prices of goods are high so therefore, foreign demand

For American goods is less.

QS has direct relationship with price, and QD has inverse relationship with price.

And QD and QS move along the curve, they do not cause a shift.

Demand And Supply have direct relationship with price. And shift the curve right or left

Due to factors OTHER than price.

Please do explain the concepts if I am wrong. Thank you !!

[M.O.D.]

Yes, lower currency means the goods in that currency are cheaper, thus increased demand.

This is true for all currencies, not just US.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

I think you have the correct understanding. Basically, just remember that a shift in supply or demand, is never caused by the price changing. A shift in the demand curve on a macro scale is due to a change in taxes, wealth, interest rates, consumer confidence, exchange rates, or government spending, while a shift in the supply curve is due to changes in input prices or supply shocks. A shift in the demand curve on a micro scale is due to changes in wealth, changes in the price of a substitute or complement good, consumer income, changes in consumer tastes or preferences, or a change in the number of buyers in the market, and a shift in the supply curve on a micro level is due to change in price expectations of the supplying firm, changes of input costs, changes in the price/demand of other good the company sells, changes in taxes, and changes in production technology.

As for your correction about inflation and appreciation/depreciation of currency; When there is inflation, the USD depreciates because one dollar isn't worth as much, therefore, net exports will rise because US goods are cheaper.

@MOD and some other people on the BEC forum helped me with my understanding of this topic too. It's confusing, for sure.

[Mehwish]

Thanks for the responses.

But doesn't inflation increase the prices, and that would decrease

The demand for the goods ?

[M.O.D.]

Inflation increases everyone's prices including wages.

Macroeconomics is the study of large country-wide trends. If inflation increases in one country's currency say the US dollar, it makes the USD depreciate compared with say the Japanese Yen.

This makes goods priced in dollars cheaper for those holding Yen, so they will buy more, and increase demand for US goods.

It will also decrease demand for Japanese goods priced in Yen because the Yen will appreciate.

Normal inflation is known ahead of time so labor contracts automatically include inflation provisions called cost of living increases. Economists take this for granted.

Hyperinflation (which happens in developing countries) is unexpected and unregulated and can lead to a mismatch between wages and the price of goods. This scenario does not really happen in the US, so it is not tested.

Though you should know the costs of inflation on the economy:

loss of savings, “shoe-leather” costs as people run to the bank to make deposits before the cash loses value, general aversion to holding cash…

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[ridiqls]

So I guess they ask this kind of stuff on the CPA exam huh

shit..

[Peterman25]

My favorite currency question (I'm not a fan of how it is worded)…

A company manufactures goods in Esland for sale to consumers in Woostland. Currently, the economy of Esland is booming and imports are rising rapidly. Woostland is experiencing an economic recession, and its imports are declining. How will the Esland currency, $E, react with respect to Woostland currency $W?

A. The $E will remain constant with respect to the $W.

B. The $E will increase with respect to the $W.

C. The $E will decline with respect to the &W.

D. Changes in imports and exports will not affect currency changes.

BEC 7/14 - PASS
FAR 10/14 - PASS
AUD 1/15 - PASS
REG 4/15 - PASS

AZ license - Official 8/20/2015

[Mehwish]

@M.O.D- There's a question in Becker

“In evaluating the impact of relative inflation rates

On the demand for foreign currency, which of the following is true?”

The answer was “As inflation associated with a foreign Economy increases in relation to domestic country,

Demand for foreign currency falls”

Shouldn't demand rise for the foreign currency if inflation is increasing?

Or would demand for foreign currency fall, but demand for their goods increase?

@Peter , my guess is B.

[M.O.D.]

@ peterman, C is my guess too, because of imports.

@mehwish

Inflation is caused by printing (or making) of more money. As the money supply increases, the value of each dollar decreases. So inflation decreases the “real” value of the dollar (compared with commodities like gold, or to other currencies).

So as the supply of currency increases, the price of the currency falls. This is not a demand question. However, people will demand less of if it is perceived as worthless.

Export trade could come into play at that time, but before considering exports, the currency depreciates.

Your question “Shouldn't demand rise for the foreign currency if inflation is increasing?”

Why would you personally demand to hold currency that is worth less and less every year, versus a currency that is stable and worth the same every year?

The second half is true, demand for goods priced in depreciated currency increases because they are cheap (relative to a strong currency).

Did you not take economics classes in the US?

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Peterman25]

The answer is actually C. I chose B too the first time I saw this question.

Answer (C) is correct.

If the growth of a country's national income is more rapid than other countries' national income, its currency is likely to depreciate. A country's imports vary directly with its level of income. As income rises in Esland, Esland consumers purchase more domestic and foreign goods. The greater demand for foreign goods causes a demand for the foreign currency. When demand increases for the foreign currency, its price increases, and Esland's currency depreciates as a result.

BEC 7/14 - PASS
FAR 10/14 - PASS
AUD 1/15 - PASS
REG 4/15 - PASS

AZ license - Official 8/20/2015

[Mehwish]

And since this is one of my weak topics, it obviously showed up on the written part. 🙁

Thanks for your help though 🙂

And yes,I took econ in States, about 7 years ago.

[Author]

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