Holding all else constant, a decrease in U.S. real GDP will ________ the supply for 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

Decreased U.S. real GDP decreases U.S. demand for Mexican goods and therefore decreases the supply of dollars in the foreign exchange market as Americas will trade less of their dollars for pesos. This decrease in supply will increase the exchange rate of pesos per dollar.

Holding All Else Constant, a Decrease in U