Look again at Figure 8.3 and answer the following questions.

a. Why is the demand curve for foreign exchange downward sloping?

b. Why is the supply curve for foreign exchange upward sloping?

c. Who would be interested in exchanging dollars for yen?

d. Who would be interested in exchanging yen for dollars?

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Equilibrium exchange rate (yen/dollar) Exchange rate Figure 8.3 Supply of The Demand and Supply of Foreign Exchange dollars Demand for dollars The lower the exchange rate, the cheaper it is to convert a foreign currency into dollars and the larger the quantity of dollars demanded. So, the demand curve for dollars in exchange for yen is downward sloping. The higher the exchange rate, the more yen households or firms will receive in exchange for dollars and the larger the quantity of dollars supplied. The supply curve of dollars in exchange for yen is upward sloping because the quantity of dollars supplied will increase as the exchange rate increases. Equilibrium quantity of dollars traded Quantity of dollars