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Question
Statistics
Posted 8 months ago
Assets in Canada are more attractive to Mexican savers and as a result, the supply of the Mexican peso has increased.
Which of the following happen to the value of the Mexican peso and the Canadian dollar?
Choose 1 answer:
(A) The peso appreciates and the dollar appreciates.
(B) The peso depreciates and the dollar is unaffected.
(c) The peso depreciates and the dollar appreciates.
(D) The peso depreciates and the dollar depreciates.
(E) Neither currency will change in value.
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Answer from Sia
Posted 8 months ago
Solution by Steps
step 1
To understand the impact on the value of the Mexican peso and the Canadian dollar, we need to consider the law of supply and demand
step 2
An increase in the supply of the Mexican peso suggests that more pesos are being exchanged for Canadian dollars
step 3
According to the law of supply and demand, if the supply of the Mexican peso increases, without a change in demand, the value of the peso will depreciate
step 4
The increased demand for Canadian dollars to purchase Canadian assets implies that the value of the Canadian dollar will appreciate
Answer
C
Key Concept
Supply and Demand in Currency Markets
Explanation
When the supply of a currency increases, its value tends to depreciate if demand remains constant. Conversely, if demand for a currency increases, its value tends to appreciate.
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