10
QuizMultiple Choice

Currencies and Exchange Rates

Question 10 • $2526: Full: 2102320: Economics HONORS: NEW CREDIT

If investors can earn 10 percent interest in an account in Mexico but just 3 percent in the United States, those investors will most likely

Answer
A
continue to invest in the United States and have no effect on the exchange rate.
B
want to invest in Mexico and cause the exchange rate to rise.
C
try to do anything possible to keep the exchange rate from changing.
D
want to invest in Mexico, which will cause the peso to appreciate.

Explanation

Investors can earn a higher return in Mexico (10%) than in the United States (3%), so they will likely move funds to Mexico. To invest there, they need pesos, increasing demand for the peso. That increased demand causes the peso to appreciate, meaning it gains value relative to other currencies.

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