Question

Suppose that an increase in a nation's income causes the nation's residents to buy more domestic and foreign goods. Given this, if U.S. residents experience an increase in income, but Mexican residents do not, it is likely that, ceteris paribus
a. the U.S. dollar will appreciate and the Mexican peso will depreciate.
b. both the U.S. dollar and the Mexican peso will appreciate.
c. the U.S. dollar will depreciate and the Mexican peso will appreciate.
d. both the U.S. dollar and the Mexican peso will depreciate.

Answer 1

Answer:

B: Both the US dollar and the Mexican peso will appreciate.

Explanation:

There are many causes of currency appreciation. In this context, an increase in income of American workers will result in a higher demand for local goods and foreign goods coming from Mexico. This means that the higher demand for Mexican currency by Americans to purchase Mexican goods will result in currency appreciation. The Dollar will also appreciate due to higher demand.