Asked by Brenda Townsend on May 06, 2024
Verified
Under a system of freely flexible (floating) exchange rates an American trade deficit with Mexico will tend to cause
A) the United States government to ration pesos to American importers.
B) a flow of gold from the United States to Mexico.
C) an increase in the peso price of dollars.
D) an increase in the dollar price of pesos.
Freely Flexible Exchange Rates
An exchange rate system in which the value of currencies are determined by the open market and subject to the forces of supply and demand without direct intervention by central banks.
American Trade Deficit
occurs when the total amount of goods and services the United States imports exceeds the amount it exports, leading to a net outflow of domestic currency to foreign markets.
- Gain insight into how supply and demand influence the determination of freely floating exchange rates.
- Describe the influence of alterations in exchange rates on international trade and investment activities.
Verified Answer
JB
Jacob BlainMay 12, 2024
Final Answer :
D
Explanation :
Under a system of freely flexible exchange rates, an American trade deficit with Mexico will cause an increase in the demand for pesos as the US needs more pesos to pay for Mexican imports. This increase in demand for pesos relative to the supply of them will lead to an increase in the dollar price of pesos, making American exports to Mexico relatively cheaper and Mexican imports to the US relatively more expensive. This is also known as a depreciation of the dollar against the peso. Therefore, the best choice is D, an increase in the dollar price of pesos.
Learning Objectives
- Gain insight into how supply and demand influence the determination of freely floating exchange rates.
- Describe the influence of alterations in exchange rates on international trade and investment activities.