Answer to Question #152752 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

As the demand for Colombian roses increases, he demand for pesos rise and the demand curve for pesos shifts rightward. Similarly, the supply for pesos decreases when the central bank in Colombia increases the interest rates. The supply curve for pesos shifts leftward raising equilibrium interest rate. Finally, a increase in interest rates offers lenders Colombia more returns in comparison to foreign states. A s result, foreign capital is attracted, causing higher exchange rates of the peso against the U.S. dollar.