Chapter 42, Problem 4MCQ

To determine

The correct option for the decrease in the real exchange rate between Pesos and the US dollar.

Answer to Problem 4MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b

If the interest rate is increased in Country M, then the investors will invest more in Country M Pesos due to which demand for the US dollar will decrease decreasing its real exchange rate. Therefore, option b is correct.

Explanation for incorrect options:

a.

If net cash flow is increased from M country to Country U, then the exchange rate will be increased.

c.

Doubling prices for both currencies will not make any difference in the exchange rates.

d.

If oil exports are reduced from Country M to the U, then the real exchange rate may increase as the export is decreased.

e.

The real exchange rate will be increased due to the increase in the current account balance on the BOP of the US.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.