Draw the graph · Macro · Foreign exchange market
US inflation outpaces Europe
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Demand for the currency shifts left. Supply of the currency shifts right.
Two things happen. Europeans buy fewer of the now-pricier American goods, so they want fewer dollars at every exchange rate, and the demand for dollars shifts left. Americans buy more of the relatively cheaper European goods, selling dollars to get euros, so the supply of dollars shifts right. Both shifts push the exchange rate down. One shift lowers the quantity traded and the other raises it, so quantity is ambiguous.
The dollar depreciates against the euro for certain, while the quantity traded may rise or fall.
Common mistake. Students often move only one curve. Inflation affects both sides: foreigners buying less from the US, and Americans buying more from abroad. Both point to depreciation.
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Lesson: Trade & Exchange Rates