Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question

Quizplus · Accepted Answer

A decrease in the real interest rate on Mexican assets will decrease the supply of dollars in the foreign exchange market as Americans desire fewer Mexican investments. This increases the exchange rate of pesos per dollar.

Holding All Else Constant, a Decrease in the Real Interest