Holding all else constant, an increase in the real interest rate on Mexican assets 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

Note that if Americans desire Mexican investments, they must first supply dollars to the foreign exchange market to obtain pesos. If the real interest rate on Mexican assets increases, then Americans will want to hold more such investments and supply more dollars. This increase in the supply of dollars will decrease the exchange rate of pesos per dollar.

Holding All Else Constant, an Increase in the Real Interest