Answer to Question #152536 in Macroeconomics for Rafayet

Question

Colombia is the world’s biggest producer of roses. The global demand for roses increases and at the
same time, the central bank in Colombia increases the interest rate. In the foreign exchange market
for Colombian pesos, what happens to?
a. The demand for pesos?
b. The supply of pesos?
c. The exchange rate of the peso against the U.S. dollar?

Answer 1

a. The demand for pesos would increase. More consumers of roses in the domestic market results to increased demand for pesos shifting the demand curve to the right.

b. The supply for pesos decreases. Higher interest rate in Colombia central bank increases the purchasing Power for pesos reducing it's supply. This shifts the supply curve of pesos to the right.

c. Higher interest rate in Colombia central bank would make the US a more attractive place for investment and could lift the dollar, thus weakening the colombian peso.