What are the factors that cause supply and demand for exchange to change? There are

several theories on this topic.

Some theories attempt to explain short run movements in exchange rates while others

study long run movements. The determinants of equilibrium exchange rates in the short run

and in the long run tend to be different.

1. Balance of Payments Approach to Exchange Rate Determination

This approach emphasizes the flows of goods, services, and investment capital that

respond gradually to real economic factors such as GDP. It predicts that exchange rate

depreciation for countries with deficits in their current accounts and appreciation for

Recall D for FX involves all debit transactions in the BPs. S involves all credit transactions.

D is downward sloping and S is upward sloping.

S and D for FX reflect changes in the domestic D for foreign goods and services and in the

foreign D for domestic goods and services. These, in turn, are determined by

macroeconomic conditions at home and abroad.

The Germans, having the same expectations, will be less willing to obtain $ whose

Thus, the ratio is also fixed.) D for money = (L*/L), the relative D for DM to $. This Money

Factors that can shift (L*/L), besides (y*/y), include: (r*-r), expectations, BT

Some common words found in the essay are:
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Approximate Word count = 3507
Approximate Pages = 14 (250 words per page double spaced)