Exchange Markets (Part 4): How Does Fiscal Policy Affect Exchange Rates

This video illustrates how exchange markets adjust when interest rates change in a particular country.  Initially, the curves shift (1), creating a temporary shortage of one currency and surplus of the another at the existing exchange rate (ER0). In this graph, the shifts create a surplus of dollars (a shortage of euros).  This surplus of dollars will result in the dollar depreciating making Europeans goods and services more expensive for Americans and US goods and services cheaper for Europeans resulting in a movement along both the demand for dollars and supply of dollars curves (2). The exchange rate will continue to fall until the surplus is cleared (3).     This video is made for 1st year college students or AP/IB Economics students.  It focuses on foundational economic concepts.

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