Answer to Question #315597 in Macroeconomics for anu

Question

Colombia is the world’s biggest producer of roses. The global demand for roses increases and at the same time Colombia’s central bank increases the interest rate. In the foreign exchange market for Colombian pesos, what happens to:

1. The demand for pesos?
2. The supply of pesos?
3. The quantity of pesos demanded?
4. The quantity of pesos supplied?
5. The peso-Canadian dollar exchange rate?

Answer 1

1.)Higher demand for Colombian roses will increase Colombian export demand, which will increase the demand for Colombian peso. As the demand for Colombian roses increases, he demand for pesos rise and the demand curve for pesos shifts rightward.

2.)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. Columbia's central bank deliberately increases the interest rate. It can do so by purchasing pesos and reducing its supply. This would shift the supply of pesos to the right

3.) The quantity of pesos demanded at first rises due to the shift in the demand curve for pesos. However, as soon as the central bank reduces the supply of pesos, the quantity of pesos demanded and supplied returns back to its original level.

4.) Here also, at first the quantity of pesos supplied will also increase at the first stage due to the rise in the demand for pesos. Finally, the quantity of pesos will automatically decrease due to the regulation imposed by the Central Bank to regulate the supply of the pesos.

5.)Finally, an 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.