Answer to Question #276741 in Macroeconomics for Anna

Question

Ceteris paribus, in the situation where Americans begin to decrease their purchases of Mexican goods, what will happen to the supply of dollars in the foreign exchange market? What will happen to the exchange rate for Mexican pesos relative to American dollars?

A. increase; increase

B. increase; decrease

C. decrease; decrease

D. decrease; increase

Answer 1

C. decrease, decrease

When reduce thpurchase of goods in the mexican market, the American dollar inflow into the mexican reduces leading to a decreased supply of American dollars. Decrease of American dollar supply in the mexican economy increases demand for dollars, making the value of American dollar to go up, as a result, the exchange rate of mexican peso relative to American dollar will go down.