Accumulating foreign currency reserves | Foreign exchange and trade | Macroeconomics | Khan Academy

Let’s say we’ve got two countries: country A and country B And at the start of our little hypothetical thought experiment they have a very stable exchange rate, maybe it’s one for one. Every A, if you were to go into a foreing currency markets, you could get a B for it. So there’s this kind of this stable supplying demand between this two currencies. Now let’s say for whatever reason folks in A start to believe that country B is the hot place to invest. They want to buy country B’s real state, they want to invest in country B’s stock market. and so if they wanna buy stuff in B they essentially have to hold more B’s currency and so more and more people in A want to exchange their “A’s” for country B’s currency. So you have this huge supply of A comming out to the foreign exchange markets but you still have the same amount of B that wanna go the other way, maybe, you know, these are maybe there to either invest in country A or maybe buy some of country’s A exports, or whatever it might be. But if we just let this happen on it’s own when all of a sudden there’s a much larger demand for converting A into B than converting B into A, you’ll have a situation where the B will just get more expensive. There’s more demand for B than there are for A. It’ll get more expensive in terms of A. So if you look at it from country A’s point of view, you’re now having to pay more A per B At a completely equivalent statement from country B’s perspective you now have to pay fewer B’s per A. Now, let’s say for whatever reason you are the central bank (right over here) of country B and you don’t like your currency becoming stronger, maybe you just don’t like the volatility in the exchange market, you don’t like the idea that the exchange rates go up and down so dramatically, maybe you just don’t want your exports to get expensive or that imports from another country to get cheap. For whatever reason you do not like this movement happening and so what you’re going to do is, because you have the right to do it, because you are the central bank of your country, you can print more of your currency (right here the currency pies) so you’re gonna print more of these, you could print more of them just like that and then you could use that extra bit that you’ve just printed to buy more A’s and so now you’ve kind of renormalized the supply and the demand for B. But what’s going to be the end product of that? Well, you did succesfully keep your currency from appreciating relative to the A’s which, based on how this was all set up, that was your goal, but the other thing that you ended up with is such a printed B’s that you’re able to buy A at the open market, you now, on your balance sheet, you have a bunch of A. And so when people talk about foreign currency reserves and pretty much every bank, every central bank has foreign currency reserves, this is what they’re talking about. That central bank printed their own currency and went out to currency for and exchange markets and bought other countries’ currencies. And there’s multiple reasons for them doing it. This might be one of them, or it might be to protect them in the case that this whole dinamic reverses in the other direction, specially if it reverses in a very dramatic way.

30 thoughts on “Accumulating foreign currency reserves | Foreign exchange and trade | Macroeconomics | Khan Academy

  1. I typed that fast 😛 I'm doing a maths unit. which is the equivalent difficulty to grade 12, if you went to high school. I have an exam in a months time, and I'll pass it thanks to Sal's videos on Derivatives and functions 🙂

  2. They have year 13 in some Asian countries. I have a friend in HK, she says year 13 is easier than year 12. But that's because year 13 is equivalent to a first year in uni, well it is for Australia anyways. I remember there were videos on You tube, where colleges in America were doing lectures for maths. The maths was the same stuff you learn in year 12 in Australia. So it's just different everywhere 😛

  3. would this still work if there was no one single national currency i.e. usd. used as international currency?

  4. can country B just buy money of country A with the new printed money? and what effect would it have on the currency graph? would it shift the demand curve of A back or shift the supply curve to the right?

  5. that's what happens in the video…there was an excess demand for money B so the central bank prints money B -> the supply increases absorbing the increased demand and balancing the money market.
    In other words, there was an excess supply of money A , so money A could be "bought" with less money B -> the prints money B and exchanges it with A as long as money B "buys more" of money A (untill the market is balanced). // It's like the standard process to the equilibrium point(long term)

  6. SAL thanks you put it in a very simple way for us to understand thank you now im more interested with numbers after listening to your video 

  7. That's why economy is not science, even if thay use scientific methd on "belived" (unreal) value you can't get nothing else than (unreal) belived result. That just like input data has nothing to do with reality.
    Well i think this suppose to be just a game.

    In the other side if we would measure material, energy, or similar and than we'd use scientific method to get what we would search for we'd get real answare.
    This is why you should look at resource-based economy.

  8. does anybody know what a foreign currency gap is?? my textbook says its a constraint on growth but doesnt really explain it.

  9. hi guys, the greatest info that i've had was by using the Magic Monitor Blueprint (just google it) definately the most helpful site that I have ever followed.

  10. Is Trabeplom System helpful to get tons of profit? We have read numerous good things about Trabeplom System (just search it on google).

  11. The whole thing is just paper money. Its an adult version of trading baseball cards and comic books. Its intrinsically worthless.

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