Foreign Tastes Turn From US Goods: The Dollar Depreciates
Foreign consumers lose their taste for American-made goods, so they buy fewer dollars to pay US sellers, shifting demand left and depreciating the dollar.
Foreign Tastes Turn From US Goods: The Dollar Depreciates
Foreign Exchange Market (USD)Foreign consumers lose their taste for American-made goods, so they buy fewer dollars to pay US sellers, shifting demand left and depreciating the dollar.
Equilibrium at Quantity of USD 80, Exchange Rate (foreign / USD) 1
Start at Equilibrium
The market for US dollars begins where the demand for dollars (D$) meets the supply of dollars (S$). The vertical axis measures the foreign currency price of one dollar.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Students predict what happens before the graph moves. No accounts, nothing graded.
Foreign Tastes Turn From US Goods: The Dollar Depreciates, step by step
- 1
Start at Equilibrium
The market for US dollars begins where the demand for dollars (D$) meets the supply of dollars (S$). The vertical axis measures the foreign currency price of one dollar.
- 2
Foreign Buyers Cool on American Goods
Buyers abroad become less enthusiastic about American brands, so at every exchange rate they want fewer US exports. Because paying a US firm requires dollars first, this taste shift reduces the demand for dollars and the demand curve shifts left. Nothing has changed about what Americans want to import, so the supply of dollars stays where it was.
- 3
The Dollar Depreciates
At the new intersection the exchange rate is lower, so one dollar buys less foreign currency and the dollar has depreciated. The equilibrium quantity of dollars traded also falls, because fewer dollars are needed to finance the smaller flow of US exports.
- 4
The Depreciation Cushions the Fall
A weaker dollar makes US goods cheaper when priced in foreign currency, which recovers part of the export loss the taste shift caused. That is a movement along the new demand curve, not a second shift. It dampens the effect without reversing it, so exports still finish lower than they started.
Where it ends up
Demand for dollars shifts left, so the dollar depreciates and the equilibrium quantity of dollars traded falls. The weaker dollar makes US goods cheaper abroad, which recovers part of the original export loss.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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