Answer to Question #152700 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 Columbian roses increases in the domestic market, the demand for Columbian pesos would increase and the demand curve for pesos would shift to the right.

b) This will lead to the Central Bank purchasing pesos and reducing its supply. This would shift the supply of pesos to the right

c) The exchange rate of the peso will be lower sine there is a higher demand for foreign currency in the foreign exchange market.