Chapter 42, Problem 6MCQ

To determine

The correct option if demand for the US dollar is increased in the foreign exchange market.

Answer to Problem 6MCQ

Option c is correct.

Explanation of Solution

Explanation for the correct option:

c

The supply of pesos will shift to the right. Due to the rightward shift of the supply of pesos, the exchange rate of the U.S. dollar and Mexican pesos will depreciate. This would lead to an appreciation of the U.S. dollar, thereby increase in the demand for it. Therefore, option c is correct.

Explanation for incorrect options:

a.

If US dollar demand is increased, then the value of the dollar will appreciate. Therefore, option a is an incorrect answer.

b.

If demand for the US dollar is increased, then the supply of Pesos will increase which will reduce the value of Pesos. Therefore, option b is incorrect.

d.

If demand for the US dollar is increased, then it will shift towards the right. Therefore, option d is incorrect.

e.

The real exchange rate will increase if demand for the US dollar is increased. Therefore, option e is incorrect.

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.