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Main content
Current time:0:00Total duration:5:17
AP.MACRO:
MKT‑5 (EU)
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MKT‑5.E (LO)
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MKT‑5.E.1 (EK)
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MKT‑5.E.2 (EK)
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MKT‑5.E.3 (EK)

Video transcript

talk a little bit about what could cause the supply or demand curve for a currency to shift so here we have the foreign exchange market for the chinese wan which is why we have the quantity of one on the horizontal axis and the price of one in terms of another currency on the vertical axis and here that other currency is the US dollar and associated with let's just call this s sub one our supply curve and d sub one our demand curve you have at the intersection an equilibrium point we have talked about this in other videos let's call that e sub one this would be some dollar price for a wan maybe it's 10 US cents per watt and then associated with that is also an equilibrium quantity q sub 1 that would be a certain amount of wan that is trading hands in a certain time period whatever time period this this graph or this model applies to so one big way to think about what would influence supply and demand is thinking about who holds the supply and then who is demanding that currency so everything about the market for the chinese wan the supply is going to be from people who hold one so people who hold one and for the most part that's going to be people in the country it's possible that someone sitting in New York has a wan denominated account or has someone sitting in their wallet but for the most part it's going to be people in the country so motivated motivated for the most part by what happens in China what happens happens in China and on the other hand if we're thinking about demand it's the other way around these would be other people that for some reason want to convert their currency their non Wan currency into the wan so people who hold other currencies other other currencies like the US Dollars and so this tends to be motivated it's possible that someone in Beijing is holding dollars or has a dollar bank account but for the most part it's going to be motivated motivated by other countries other other countries and so for example if we think about supply what could shift the supply to the right or it could increase supply so shifting to the supply means more Chinese want to sell their WAN they want to convert it into something else let's say US Dollars and so this could be an increase in demand so increase in demand for foreign foreign we could say goods services or assets in this case it might be an increase in demand for American goods services or assets they might want American assets because they get a better return there or maybe they view them as safer investments maybe they want to send their children to an American College so there's a demand or there's an increase in demand for sending kids to the american colleges so that's a service maybe they are interested in buying more American cars another thing that could increase the demand for say American goods is if there's a decrease in tariffs on those things so think those things have become cheaper in China so any of these things could shift the supply curve to the right this is S sub 2 and then associated with that we would have a new equilibrium exchange rate East sub 2 and a new equilibrium quantity that is changing hands and notice the price of the wan has now gone gone down as people are demanding in this case more American goods and of course if we switch the arrows here if we if we had a lower demand for let's say American goods services and assets then the supply curve would shift to the left and the wand would become more expensive in terms of dollars and so on the demand side it works the other way around what could shift the demand curve to the right so let's say this is d let's call this D 3 right over here 2 right over here let's assume that the supply curve has not been shifted so this would go to e sub 3 so the wand has become more expensive and that makes sense more people are demanding it and we have a different quantity now let's call that Q sub 3 but what would cause it to shift in that way so demand for one for one would go up if you have an increase in demand for Chinese goods from foreigners Chinese goods actually I should say services services or assets so if you have an increase in the number of Americans who we're holding dolls or are holding dollars and saying hey I could get a better return if I invest in China maybe it's growing faster and so I want to convert my dollars into one I want to buy one with my dollars so that I could buy so I could participate in the Chinese stock market or buy shares in a or somehow by some Chinese real estate or whatever else it might be and obviously if demand for Chinese goods services and assets were to go down then the demand curve would shift the other way
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