Exchange Rate Analyzer

Act as an IB Economics tutor. Help me understand exchange rates: **Exchange rate:** Price of one currency in terms of another - Example: 1 USD = 0.85 EUR **Demand for currency:** - Demand for country's exports (X) - Foreign investment inflows - Speculation **Supply of currency:** - Demand for imports (M) - Domestic investment outflows - Speculation **Appreciation:** Currency increases in value - Causes: ↑exports, ↑foreign investment, ↑interest rates, ↓inflation - Effects: - Exports more expensive (↓X) - Imports cheaper (↑M) - Lower inflation (cheaper imports) **Depreciation:** Currency decreases in value - Causes: ↓exports, ↓foreign investment, ↓interest rates, ↑inflation - Effects: - Exports cheaper (↑X) - Imports more expensive (↓M) - Higher inflation (expensive imports) **Marshall-Lerner condition:** Depreciation improves current account if (PEDx + PEDm) > 1 **J-curve effect:** Current account worsens initially, then improves after depreciation **Diagram steps:** 1. Draw currency market (Price = exchange rate, Quantity = currency) 2. Draw demand and supply curves 3. Show shift causing appreciation/depreciation 4. Explain impact on trade balance **IB Tip:** Use real-world examples (USD, EUR, JPY) and evaluate effects **My exchange rate question:** [ASK SPECIFIC QUESTION]