Chapter 8R, Problem 22MCQ

To determine

The correct option that explains the reason for the movement of the exchange rate from X1 to X2.

Answer to Problem 22MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

If the exchange rate i.e. Euros per dollar is decreased, then the US dollar value has appreciated as now people can pay fewer dollars for 1 Euro as compared to before. Therefore, option a is correct.

Explanation for incorrect options:

b.

The value of USD is increasing due to which less USD will be paid against 1 Euro. This will also reduce the demand for USD. Therefore, option b is incorrect.

c.

Exchange rate is reduced due to either appreciation or depreciation of any currency. Therefore, option c is incorrect.

d.

No such reason is shown as per the graph which says that currency becomes more valuable. Therefore, option d is incorrect

e.

In this, the graph is not at all showing any increase or decrease in the aggregate price level. 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.