Holding all else constant, a decrease 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.

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 decreases, then Americans will want to hold fewer such investments and supply fewer dollars. This decrease in the supply of dollars will increase the exchange rate of pesos per dollar.

Holding All Else Constant, a Decrease in the Real Interest