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Question
Microeconomics
Posted 2 months ago

The citizens of Burginland are convinced that there will never be an improvement in the economic situation there and that there are likely to be widespread defaults on bonds and bank failures. As a result, they want to buy more financial assets from their trading partner, Marthaland. The currency in Burginland is the eagle and the currency in Marthaland is the jean.

What is the effect of the increased demand for Marthaland's financial assets on the real value of each country's currency?

Choose 1 answer:

A The Burginland eagle depreciates and the Marthland jean appreciates.

B The Burginland eagle appreciates and the Marthland jean appreciates.
(C) The Burginland eagle appreciates and the Marthland jean depreciates.
(D) The Burginland eagle appreciates and the Marthland jean is not affected.
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Answer from Sia
Posted 2 months ago
Solution
a
Increased Demand for Financial Assets: When the citizens of Burginland want to buy more financial assets from Marthaland, they need to exchange their currency (eagle) for Marthaland's currency (jean). This increases the demand for the jean
b
Currency Appreciation and Depreciation: An increase in demand for the jean will cause the jean to appreciate. Conversely, the increased supply of the eagle in the foreign exchange market will cause the eagle to depreciate
Answer
A The Burginland eagle depreciates and the Marthland jean appreciates.
Key Concept
Currency Appreciation and Depreciation
Explanation
When the demand for a country's financial assets increases, the demand for its currency also increases, leading to its appreciation. Conversely, the currency of the country whose assets are being sold will depreciate due to increased supply in the foreign exchange market.

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