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 21.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 21.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee, other things equal, is most likely to result in a new equilibrium exchange rate of: A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals. B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals. C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals. D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals. E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Question

Quizplus · Accepted Answer

A decrease in Mexican demand for Brazilian coffee would shift the demand curve to the left (D₁ to D₂). This would result in a new equilibrium exchange rate where the quantity supplied equals the quantity demanded. This new equilibrium exchange rate would be lower than the initial exchange rate. Therefore, the equilibrium exchange rate would move from 10 pesos per real to a lower value, likely in between 6 and 8 pesos per real. Option C is the only option that fits this criteria (8 pesos per real), and the equilibrium quantity would be 150 Brazilian reals.

The Figure Given Below Depicts the Demand and Supply of Brazilian