Holding all else constant, an increase in the real interest rate on U.S. assets will ________ the demand 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

An increase in the real interest rate on U.S. assets will increase the demand for dollars in the foreign exchange market as foreigners desire more U.S. investments. This increases the exchange rate of pesos per dollar.

Holding All Else Constant, an Increase in the Real Interest