Question

Suppose that you are looking at the currency market diagram for the dollar (supply and demand for $ relative to the Mexican peso). If US stocks and bonds become popular for Mexican investors then consider which curve shifts (and which direction) In addition, does the dollar appreciate or depreciate and how does that affect the US trade deficit. Which answer below is most accurate?

Group of answer choices

Supply shifts right so the dollar depreciates and the trade deficit shrinks

Demand shifts right so the dollar appreciates and the trade deficit rises

Supply shifts left so the dollar appreciates and the trade deficit shrinks

Demand shifts right so the dollar depreciates and the trade deficit shrinks

Demand shifts right so the dollar appreciates and the trade deficit shrinks

Answer 1

Consider the graph with Mexican Peso/$. If the popularity of US stocks and bonds increase among Mexican investors, then the demand for United States dollars increase with which the demand curve shift to the right as a result of which the quantity increases and the exchange rate in terms of Mexican peso per United States dollar also increases. As result of which you can understand that you are getting more of mexican currency per dollar which means the dollar appreciated. because the dollar is appreciated Mexican goods will be more cheaper in United States and United States good will be more expensive in Mexico as a result of which the exports to Mexico decrease and imports to United States increase and this can worsen the trade deficit

Therefore (b)Demand shifts right so the dollar appreciates and the trade deficit rises is the answer to this question