If the dollar appreciates against the Mexican peso, consumers in Mexico are likely to buy more local products, and consumers in the United States are likely to buy more Mexican products. This phenomenon is known as:
A) forward exchange rates.
B) currency pass through.
C) expenditure switching.
D) depreciation of the dollar.

Question

Quizplus · Accepted Answer

Expenditure switching is the phenomenon where an appreciation of a currency leads to a switch in expenditure from foreign to domestic goods. In this case, as the dollar appreciates against the Mexican peso, Mexican consumers are likely to buy more local products (i.e. switch their expenditure from US to local goods), while US consumers are likely to buy more Mexican products (i.e. switch their expenditure from domestic to foreign goods).

If the Dollar Appreciates Against the Mexican Peso, Consumers in Mexico