The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1 In the figure:
D 1 and D 2 : Demand for Brazilian reals
S 1 and S 2 : Supply of Brazilian reals
-Refer to Figure 22.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee,other things equal,is most likely to result in a new equilibrium exchange rate of:
A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals.
B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals.
C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals.
D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals.
E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Question

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1  In the figure:
D 1 and D 2 : Demand for Brazilian reals
S 1 and S 2 : Supply of Brazilian reals
-Refer to Figure 22.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee,other things equal,is most likely to result in a new equilibrium exchange rate of:
A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals. 
B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals. 
C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals. 
D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals. 
E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Quizplus · Accepted Answer

A decrease in Mexican demand for Brazilian coffee, other things equal, indicates that the demand for Brazilian reals will decrease. This is shown by a leftward shift in the demand curve from DS1U1B11 to DS1U1B12. The initial equilibrium exchange rate at 10 pesos per real is no longer valid as the demand and supply have changed. The new equilibrium exchange rate will be where the new demand and supply curves intersect.

From the graph, we can see that the new equilibrium exchange rate is likely to be around 8 pesos per real where the new demand (DS1U1B12) and supply (SS1U1B12) curves intersect. At this new equilibrium, the equilibrium quantity of Brazilian reals traded is likely to be around 150 Brazilian reals. Therefore, the best choice is C.

The Figure Given Below Depicts the Demand and Supply of Brazilian