Suppose that an increase in a nation's income causes the nation's residents to buy more domestic and foreign goods.Given this,if U.S.residents experience an increase in income,but Mexican residents do not,it is likely that,ceteris paribus,

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Quizplus · Accepted Answer

An increase in U.S. income will lead to an increase in demand for both domestic and foreign goods. As a result, U.S. residents will need to buy more foreign goods, including goods from Mexico, which will increase the demand for Mexican pesos to pay for those goods. This increase in demand for pesos will cause the peso to appreciate. On the other hand, if Mexican residents do not experience an increase in income, then the demand for U.S. goods by Mexican residents will remain unaffected. Therefore, there will be no change in demand for the U.S. dollar, leading to a depreciation of the U.S. dollar relative to the Mexican peso.

Suppose That an Increase in a Nation's Income Causes the Nation's