6.4: Effects of Changes in Policies and Economic Conditions on the Foreign Exchange Market

Question 1

What would cause changes in the foreign exchange rate?

Answer 1

Any policy that changes the price level and interest rate

Question 2

What will happen to the Peso if expansionary policy causes inflation?

Answer 2

Peso depreciate

Demand decreases b/c trading will not want to purchase high priced products from Mexico

Supply increases, Mexicans will look to buy lower priced import

Question 3

What will happen to Pesos is Mexico takes on expansionary monetary changes the interest rates?

Answer 3

Peso depreciate

Demand decreases b/c less foreigner will purchase Mexican financial assets

Supply increases b/c Mexicans will buy more financial assets outside the country

Question 4

Tariff

Answer 4

tax on importd

Question 5

Quota

Answer 5

limit on the quantity of imports

Question 6

What do tariffs & quotas do?

Answer 6

Decrease the number of imports therefore decreases the supply of the currency, restricting trade since fewer transactions are taking place