18 #10 changes in the foreign-exchange market 10. Changes in the foreign-exchang

Question

18 #10 changes in the foreign-exchange market

10. Changes in the foreign-exchange market The following questions focus on the exchange rate between the Russian ruble and the Mexican peso. Assume the exchange rate is flexible. The exchange rate is defined as the number of rubles you must pay for one peso. Suppose an economic downturn in Mexico causes Mexican incomes to decrease, while Russian incomes remain unchanged Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Supply of Pesos Demand for Pesos Supply of Pesos or l QUANTITY OF PESOS

Explanation / Answer

1) Depretiate

Decrease in incomes in mexico will lead to depretiation of mexican currency, The reason is simple, If mexican nation does not make enough money they still have to buy US dollars to buy important stuff like Crude oil etc. This will cause depretiation of its currency.

2) Appretiate

Russian ruble appretiates relative to mexican currency

3) Decrease

Real intrest rates fall, When real intrest rates fall the statement actually means inflation has increased. When inflation increases supply of pesos decrease.

4) Increase

Demand for peso increase as supply drops

5) Depretiate

Depretiation occurs.

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