Assume that,under a system of flexible exchange rates,Mexicans decide to increase their financial investment in Canada.As a result:
A)Canadians will want to buy fewer Mexican products at the new exchange rate
B)the peso and the Canadian dollar will both depreciate in value
C)the peso and the Canadian dollar will both appreciate in value
D)the peso will depreciate and the Canadian dollar will appreciate in value
E)there will be no change in the values of the two currencies

Question

Quizplus · Accepted Answer

If Mexicans increase their financial investment in Canada, they will demand more Canadian dollars to make those investments, increasing the demand for the Canadian dollar relative to the peso. This increased demand will lead to an appreciation of the Canadian dollar, while the increased supply of pesos on the market will lead to a depreciation of the peso. Therefore, option D is the correct choice, stating that the peso will depreciate and the Canadian dollar will appreciate in value.

Assume That,under a System of Flexible Exchange Rates,Mexicans Decide to Increase