6.2 Exchange Rates
An exchange rate is the price of one currency in terms of another; a currency appreciates when it buys more foreign currency, depreciates when less.
An exchange rate is just a price: how much of one currency it takes to buy another. Every rate can be quoted both ways — if 1 euro costs 1.25 dollars, then 1 dollar costs 0.80 euros — and the two quotes are reciprocals. When one currency appreciates, the other must depreciate.
Appreciation means a currency buys MORE foreign currency; depreciation means it buys less. A stronger dollar makes foreign goods cheaper for Americans (imports rise) and American goods pricier for foreigners (exports fall) — the trade consequences arrive in Topic 6.5.
AP Macro focuses on floating exchange rates, set by supply and demand in the foreign exchange market. Under a fixed regime a government pegs the rate and must intervene to defend it, but the graphs you draw all year assume floating rates.
Key terms for 6.2
Drag the curves yourself — the fastest way to make 6.2 stick.
Misreading a rise in the dollars-per-euro rate as dollar appreciation. If it takes MORE dollars to buy a euro, the dollar has DEPRECIATED and the euro has appreciated.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free — no spam.
No spam. Unsubscribe anytime.