Consider the market for dollars. If the exchange rate rises from 2 pesos per dollar to 4 pesos per dollar,
A) there is a downward movement along the supply curve for dollars.
B) the supply curve of dollars shifts leftward.
C) there is an upward movement along the supply curve for dollars.
D) the supply curve of dollars shifts rightward.

Question

Quizplus · Accepted Answer

The exchange rate is the price of dollars in pesos. Therefore, an increase in the exchange rate (from 2 pesos/dollar to 4 pesos/dollar) means that the price of dollars has increased relative to pesos. As a result, buyers of dollars (e.g. Mexican importers purchasing goods from the US) will demand fewer dollars because each dollar is more expensive in terms of pesos. This translates into a movement upward along the supply curve for dollars (not a shift). Therefore, there is no change in the supply curve itself, just a change in the quantity supplied at each price.

Consider the Market for Dollars