Macroeconomics › Section P · Exchange rates and international capital flows › Topic P.2
Demand and supply shifts in currency markets
Exchange rates can swing by several percent in a week and drift by far more over a decade. A demand and supply diagram for a currency shows why: expectations, interest rates and inflation shift the curves, while purchasing power parity acts as a slow anchor.
In this topic
- A market for dollars
- Two views of one market
- Why both curves often move
- Expectations about the future
- Rates of return
- Worked example: a rise in US interest rates
- Relative inflation
- Purchasing power parity
- Worked example: a PPP comparison
- Common mistakes to avoid
- Key takeaways
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