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

-In 1991, the French mineral water Perrier was temporarily taken off the market in the United States because of suspected impurities. Other things equal, this action brought about:
A)an increase in the demand for Perrier.
B)a decrease in the price of Perrier in terms of French francs.
C)a depreciation of the French franc relative to the U.S. dollar.
D)an appreciation of the French franc relative to the U.S. dollar.
E)an increase in the supply of dollars in the foreign exchange market.

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
 
-In 1991, the French mineral water Perrier was temporarily taken off the market in the United States because of suspected impurities. Other things equal, this action brought about:
A)an increase in the demand for Perrier. 
B)a decrease in the price of Perrier in terms of French francs. 
C)a depreciation of the French franc relative to the U.S. dollar. 
D)an appreciation of the French franc relative to the U.S. dollar. 
E)an increase in the supply of dollars in the foreign exchange market.

Quizplus · Accepted Answer

Temporary withdrawal of Perrier from the US market caused a decrease in the demand for French francs, as Americans bought fewer bottles of Perrier. According to the law of demand, a decrease in demand leads to a decrease in price. This decrease in demand for francs led to an excess supply of francs in the foreign exchange market, which caused the French franc to depreciate relative to the US dollar.

The Figure Given Below Depicts the Demand and Supply of Brazilian