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. If the initial equilibrium exchange rate is 6 pesos per real, then other things equal, a decrease in the number of Brazilian tourists to Mexico would: A)increase the demand for Brazilian reals from D₂ to D₁ and increase the exchange rate to 8 pesos per real. B)decrease the supply of Brazilian reals from S₁ to S₂ and increase the exchange rate to 8 pesos per real. C)decrease the supply of Brazilian reals from S₁ to S₂ and increase the exchange rate to 10 pesos per real. D)decrease the demand for Brazilian reals from D₁ to D₂ and increase the exchange rate to 8 pesos per real. E)decrease the supply of Brazilian reals from S₁ to S₂ and increase the demand for Brazilian reals from D₂ to D₁, thereby changing the exchanging rate to 10 pesos per real.

Question

Quizplus · Accepted Answer

A decrease in the number of Brazilian tourists to Mexico would lead to a decrease in the supply of Brazilian reals in the foreign exchange market. This would cause a leftward shift of the supply curve from S₁ to S₂. As a result, the equilibrium exchange rate would increase from 6 pesos per real to a new higher equilibrium exchange rate. The correct answer is, therefore, B.

The Figure Given Below Depicts the Demand and Supply of Brazilian