If the exchange rate rises, then the quantity of dollars demanded decreases because with the higher u. S. Exchange rate, u. S. Exports decreases.
What happens when the exchange rate decreases?
- A fall in the exchange rate is known as a depreciation in the exchange rate (or devaluation in a fixed exchange rate system).
- It means the currency is worth less compared to other countries.
- For example, a depreciation of the dollar makes US exports more competitive but raises the cost of importing goods into the US.
What does a rise in exchange rate mean?
- When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down.
- When the value of a currency increases, it is said to have appreciated.
- On the other hand, when the value of a currency decreases, it is said to have depreciated.
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