Exchange Rates, Appreciation, and Depreciation

An exchange rate just answers: how much of currency B do you get for one unit of currency A? That price moves daily because it's set in a market, driven by supply and demand for each currency. Anything that makes dollars more wanted relative to euros — higher US interest rates, more foreign demand for US goods, investors chasing US assets — pushes the dollar's value up against the euro, and vice versa.

Because the rate links two currencies, you can always quote it from either side, and the two numbers are reciprocals. If one euro costs 1.25 dollars, then one dollar buys 1/1.25 = 0.80 euros. Learn to flip between the two quotes instantly, because problems will hand you whichever one is less convenient.

Appreciation means a currency now buys more of the other currency than before; depreciation means it buys less. A stronger (appreciated) dollar is good for American travelers and importers — foreign goods and trips get cheaper — but bad for American exporters, since foreign buyers now need more of their own currency to buy the same dollar-priced good. That tension is exactly why Unit 6 connects exchange rates to net exports: appreciation tends to shrink a country's exports and swell its imports, moving the trade balance toward deficit, which is the bridge to how interest rates and capital flows ripple through to aggregate demand.