Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can describe the foreign exchange market and say what its price, the exchange rate, measures. (Guide: “What the foreign exchange market is”)
- I can explain that the demand for a currency comes from the demand for that country’s goods, services and financial assets. (Guide: “Who demands valdas?”; Practice Q1)
- I can explain that the supply of a currency comes from that country’s residents paying for things in other currencies. (Guide: “Who supplies valdas?”; Practice Q1, Q7(a))
- I can explain why a change in the exchange rate is a movement along the curves, not a shift. (Guide: “Equilibrium, surplus and shortage”; Practice Q3)
Graphing and calculation
- I can draw a graph of the market for a currency with both axes labelled correctly. (Guide: Figure 1; Practice Q6(a))
- I can find the equilibrium exchange rate and quantity from a table or from equations. (Guide: Worked example 1; Practice Q4, Q5(a))
- I can calculate a surplus or shortage of a currency at a given exchange rate. (Practice Q5(b)–(c))
- I can convert an exchange rate into its reciprocal and find the value of trades in the other currency. (Guide: Worked example 1(d); Practice Q5(d), Q7(b))
Reasoning
- I can explain why the demand curve for a currency slopes downward and the supply curve slopes upward, using prices of real goods. (Guide: Worked example 2; Practice Q3, Q6(d))
- I can explain, with a graph, how a surplus or shortage moves a flexible exchange rate back to equilibrium. (Guide: Figure 1; Practice Q2, Q6(b)–(c))
- I can link the market for one currency to the market for the other, including opposite percentage changes. (Guide: “Two markets, one set of trades”; Practice Q7(c)–(d))
All ticked? Move on to Topic 6.4, Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market, or return to the course roadmap.