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.If the initial equilibrium exchange rate is 6 pesos per real, then other things equal, a decrease in the number of Brazilian tourists to Mexico would: A)increase the demand for Brazilian reals from D₂ to D₁ and increase the exchange rate to 8 pesos per real. B)decrease the supply of Brazilian reals from S₁ to S₂ and increase the exchange rate to 8 pesos per real. C)decrease the supply of Brazilian reals from S₁ to S₂ and increase the exchange rate to 10 pesos per real. D)decrease the demand for Brazilian reals from D₁ to D₂ and increase the exchange rate to 8 pesos per real. E)decrease the supply of Brazilian reals from S₁ to S₂ and increase the demand for Brazilian reals from D₂ to D₁, thereby changing the exchanging rate to 10 pesos per real.

Question

Quizplus · Accepted Answer

If the number of Brazilian tourists to Mexico decreases, then the demand for Mexican pesos will decrease and the supply of Brazilian reals will decrease. As a result, the supply curve for Brazilian reals will shift to the left from S₁ to S₂. This will lead to a new equilibrium exchange rate of 8 pesos per real, as shown by the intersection of the new supply curve with the demand curve. Therefore, choice B is the correct answer.

The Figure Given Below Depicts the Demand and Supply of Brazilian