The market for foreign currencies is a lot like the market for apples or cars or fish, so we can use the same intuition—as long as we keep reminding ourselves which way is “up” and which is “down.” Consider the market for something called “euros” (maybe it’s a new breakfast cereal) and measure the price in dollars. Discuss the following cases:
a. The people who make “euros” decide to produce many more of them. Is this a shift in supply or in demand, and in which direction? What does this do to the price of euros?
b. Consumers and businesses decide that they’d like to own a lot more euros than before. Is this a shift in supply or in demand, and in which direction? What does this do to the price of euros?
c. There’s a slowdown in the production of euros, initiated by the executives in charge of euro production. Is this a shift in supply or in demand, and in which direction? What does this do to the price of euros?
d. Suppose that the price of apples rises. Using the same language as in parts a and b, would you describe this as a strengthening of the dollar or a weakening of the dollar?