Chapter 45, Problem 4MCQ

To determine

The correct option if the aggregate price level in country M relative to country U is decreased.

Answer to Problem 4MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

Due to the fall in the price level in country M, there will be an increase in the demand for pesos, as the value of the currency has appreciated, thereby, appreciating the exchange rate. Therefore, option a is correct.

Explanation for incorrect options:

b.

If demand is increased, then the value of the currency will appreciate as the exchange rate is increased. Therefore, option b is incorrect.

c.

There is an inverse relationship between price and demand. If the price level decreases, then demand for Peso will increase. Therefore, option c is incorrect.

d.

Demand will increase if the price level is decreased. Also, the exchange rate will increase appreciating the value of the currency. Therefore, option d is incorrect.

e.

Decrease in the aggregate price level will increase the demand along with the exchange rates. Therefore, option e is the incorrect answer.

Economics Concept Introduction

International trade: International trade is an exchange of goods and services across nations. This is due to globalization and comparative advantage. It means goods are produced in one country and are sold in some other country.