ABSTRACT
In the preceding chapter we used the balance-ofpayments account to identify the forces influencing a currency’s supply and demand. In this chapter we expand upon these forces on supply and demand by deriving the supply and demand curves for a currency. As we might expect, this involves consideration of the effects of all the flows between residents and the rest of the world that are listed in the balance of payments. With the balance-of-payments account recording flows of payments into and out of a country, the explanation of exchange rates based on the account emphasizes flow demands and supplies of a currency.1 However, as we shall see, in the case of currencies there is no assurance that the supply-and-demand situation has the form that is familiar from studying supply and demand in other markets. In particular, there is no assurance that the supply curve of a currency will be upward-sloping.
