An exchange rate is the price of one currency in terms of another. Move the rate between the dollar and the euro, watch what happens to the price of each country's goods, and see which currency appreciated. Then practice reading rate changes in the drill until you can do it without thinking.
The two rate sliders are always reciprocals: move one and the other follows. Grey dashed marks show the starting rate and starting prices. The sellers' prices in their own currencies stay fixed, so every change you see comes from the exchange rate.
Rule: in a rate written "A per B", the number is the price of one B. If the number rises, B appreciated and A depreciated. If it falls, B depreciated and A appreciated.
The price of one currency in terms of another. "0.80 euros per dollar" means one dollar costs 0.80 euros. The currency after "per" is the one being priced.
Every rate can be written two ways, and the two numbers are reciprocals. If $1 = €0.80, then €1 = 1 ÷ 0.80 = $1.25. When one number goes up, the other goes down.
A currency appreciates when one unit buys more of the other currency. If the rate rises from 1.00 to 1.25 euros per dollar, the dollar appreciated.
A currency depreciates when one unit buys less of the other currency. When the dollar appreciates against the euro, the euro depreciates against the dollar. Both happen at once.
An appreciating currency makes the country's goods more expensive to foreign buyers and foreign goods cheaper at home. Its exports fall and its imports rise. A depreciating currency does the opposite.
Under a floating exchange rate, supply and demand in the foreign exchange market set the rate. Under a fixed exchange rate, a government or central bank buys and sells currency to hold the rate at a target.
Read the label first. Then decide which currency got stronger, and finish the chain to U.S. exports and imports.
| Rate change | Same change, other way | Dollar | Other currency | U.S. exports | U.S. imports |
|---|---|---|---|---|---|
| €/$ rises: 1.00 → 1.25 | $/€ falls: 1.00 → 0.80 | Appreciates (+25%) | Euro depreciates (−20%) | ↓ (cost more in euros) | ↑ (cost less in dollars) |
| €/$ falls: 1.00 → 0.80 | $/€ rises: 1.00 → 1.25 | Depreciates (−20%) | Euro appreciates (+25%) | ↑ | ↓ |
| $/€ rises: 1.10 → 1.30 | €/$ falls: 0.91 → 0.77 | Depreciates | Euro appreciates | ↑ | ↓ |
| ¥/$ rises: 100 → 120 | $/¥ falls: 0.0100 → 0.0083 | Appreciates | Yen depreciates | ↓ | ↑ |
| $/£ falls: 1.40 → 1.20 | £/$ rises: 0.71 → 0.83 | Appreciates | Pound depreciates | ↓ | ↑ |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 6.2. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 6 terminology guide.