Final answer:
If a currency price is expected to rise, the higher price a buyer pays is reflected in an increased equilibrium exchange rate due to the shifts in demand and supply in the foreign exchange market. For example, if the Mexican peso is expected to appreciate, its price might increase from 10 cents per peso to 12 cents per peso. Expected currency appreciation can also potentially lead to higher investment yields due to increased demand.
Step-by-step explanation:
If a currency price is expected to rise in the future, the higher price a buyer pays is reflected in an increased equilibrium exchange rate. This concept can be understood through the supply and demand model in the foreign exchange market, where expectations about future exchange rates play a significant role. When a business newspaper predicts that a currency, such as the Mexican peso, will appreciate, it causes the demand for that currency to shift to the right, while the supply shifts to the left because holders become less willing to sell. This scenario increases the price of the currency; for example, the equilibrium exchange rate of the peso could rise from 10 cents per peso to 12 cents per peso, affecting the equilibrium quantity as well.
In this context, the higher price buyers would pay for the currency is the new equilibrium price after the demand increase, such as the rise from 10 to 12 cents/peso in the example. These dynamics also impact various economic actors differently, such as tourists and investors, depending on whether they are dealing with a stronger or weaker version of their home currency.
Moreover, expected appreciation of a currency can influence investment yields, like the interest rates on government bonds, as the demand for the currency increases, potentially leading to higher yields due to more favorable future exchange rates.