United States exporters wish to be paid for their goods and services in dollars, yet the buyers in foreign countries possess their own local currencies, not dollars. Likewise, United States importers must pay in foreign currencies but possess only dollars. A market for foreign exchange allows U.S. importers - demanding the foreign currency - and foreign importers - supplying the foreign currency - to make an exchange.

Exploration: What factors cause the exchange rate to change?

Consider the market for Japanese yen shown in the graph. The price is measured in the number of U.S. dollars required to purchase one Japanese yen. Currently, the market is in equilibrium - neither surplus nor shortage. Using the interactive graph, you can illustrate the impacts of changes in exports or imports on the market for foreign exchange. Click on the label of the appropriate curve and drag it to a new location to shift either demand or supply; click on the New Equilibrium to observe the market adjustments necessary to restore equilibrium.

1. Suppose U.S. citizens wish to import more goods from Japan. Will the yen appreciate or depreciate relative to the dollar?
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2. Alternatively, suppose Japanese citizens wish to import more goods from the U.S. Will the yen appreciate or depreciate relative to the dollar?
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