Of buying foreign exchange; that is, we assume that there are no individuals who wish to buy the

Euro simply because they think that its price will go up in the future.

The idea of an exchange rate is not different from the idea of paying a certain price for something

You want to buy. If you like to buy coffee, you know you have to pay, say, 25 cents a cup. If the

price went up to $1, you would probably buy fewer cups. If the price went down to 5 cents, you

Might buy more. In other words, the demand curve for cups of coffee, expressed in terms of dollars,

Slopes downward following the law of demand. The demand curve for the Euro also slopes downward.

Vocabulary Notes to Text 6.7.1.1

Any speculation aspect — любой спекуляционный аспект

6.7.1.2. Read the text “Purchasing Power Parity,” translate it and explain the following: What

does the average value of exchange rates depend on in the long run?

Purchasing Power Parity

Different countries have different rates of inflation. These different inflation rates are an important

Factor in determining floating exchange rates. Indeed, one theory of the determination of exchange

Rates is called purchasing power parity (PPP), which exists between any two currencies whenever

Changes in the exchange rate reflect only relative changes in price levels in the two countries.

More specifically, over the long run, the average value of exchange rates depends on their purchasing