AS Level Oct/Nov Exam 22 Question help

[Analiegh]

One of the questions was to do with, "What determines the demand and supply of a currency in a foreign exchange market" (8 Marks)

What are some relevant points?

 

[Mohamudally Parweez]

What Determines the Demand for a Currency?:

The supply of a currency on a foreign exchange market is determined by the following:

• Demand for goods, services and investments priced in that currency. If I want to buy Canadian bonds or Canadian maple syrup, then I will need Canadian dollars to do so. If total expenditures, by non-Canadians, on these items rise, the demand for the Canadian dollar will rise.
  
  
• Speculators. If I believe, for whatever reason, the Canadian dollar will rise in value in the future, I will want to buy more Canadian dollars today.
  
  
• Central banks - Occasionally central banks will buy up a foreign currency to affect the exchange rate.

What Determines the Supply of a Currency?:

The supply of currency is affected by the following:

• Demand for goods, services and investments priced in a different currency. If I want Canadian maple syrup, I will need Canadian dollars. To get Canadian dollars, I will have to supply a currency in return, such as yen or U.S. dollars.
  
  
• Speculators. If I believe, for whatever reason, the Canadian dollar will fall in value in the future, I will start to sell off my Canadian dollars today (that is, supply them to the market).
  
  
• Central banks through increases in the money supply.