The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 36.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 36.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee, other things equal, is most likely to result in a new equilibrium exchange rate of: A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals. B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals. C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals. D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals. E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Question

Quizplus · Accepted Answer

A decrease in Mexican demand for Brazilian coffee would decrease the demand for Brazilian reals in the foreign exchange market. This would cause a leftward shift in the demand curve from D₁ to D₂. As a result, the initial equilibrium exchange rate of 10 pesos per real would be higher than the new equilibrium exchange rate. The new equilibrium exchange rate would be where the reduced demand curve (D₂) intersects the supply curve (S₁), which is at an exchange rate of 8 pesos per real. The equilibrium quantity traded would be the point where the demand and supply curves intersect, which is 150 Brazilian reals. Therefore, the answer is C.

The Figure Given Below Depicts the Demand and Supply of Brazilian