In the short run, the value of a country’s currency depends on the supply of and demand for the currency in foreign exchange markets.

a. When people in the United States wish to purchase foreign goods and services or invest in foreign assets, they must supply dollars to the foreign exchange market.

b. The more foreign currency that can be exchanged for one dollar, the greater will be the supply of dollars. That is, the supply curve for dollars slopes upward.

c. Foreigners who wish to purchase American-made goods and services or invest in U.S. assets will demand dollars in the foreign exchange market.

d. The fewer units of foreign currency needed to buy one dollar, the higher the demand for dollars. That is, the demand curve for dollars slopes downward.

e. Anything that increases the desire of Americans to buy foreign-made goods and services or invest in foreign assets will increase the supply of dollars (shift the supply curve for dollars to the right), causing the dollar to depreciate.

f. Anything that increases the desire of foreigners to buy American-made goods and services or invest in U.S. assets will increase the demand for dollars (shift the demand curve for dollars to the right), causing the dollar to appreciate.