If interest rates in Mexico decrease while the interest rates in the United States remain unchanged then
A) the supply of Mexican pesos will increase.
B) the supply of U.S. dollars will increase.
C) the supply of Mexican pesos will decrease.
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

If interest rates in Mexico decrease, then the return on Mexican investments is lower relative to other countries, which will make foreign investors less likely to hold Mexican pesos. As a result, there will be less demand for pesos, causing the supply of pesos to increase. This is because investors will look to hold alternative currencies that can offer them a higher return, such as the U.S. dollar. Therefore, the supply of U.S. dollars remains unchanged, and the correct answer is A.

If Interest Rates in Mexico Decrease While the Interest Rates