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Chapter 22: Problem 2

The lower the dollar price of a peso, the higher is the quantity demanded of pesos and the lower is the quantity supplied of pesos. Do you agree or disagree? Explain.

Short Answer

Expert verified
Agree. The Laws of Demand and Supply in economics support this statement: a lower dollar price of peso increases the demand for pesos while decreasing the supply.

Step by step solution

01

Understanding the relationship between price and demand

Under the Law of Demand, as the price of a good (or in this case, a currency) increases, the quantity demanded decreases, and vice versa. So, if the dollar price of a peso decreases, it can be inferred that the quantity demanded of pesos will increase.
02

Understanding the relationship between price and supply

Under the Law of Supply, as the price of a good increases, the quantity supplied also increases, and vice versa. Hence, if the dollar price of peso decreases, the quantity of pesos supplied will decrease.
03

Evaluate the statement

Considering the laws of supply and demand covered in the first and second steps, it can be stated that the proposition is accurate on the aspect of demand: the lower dollar price would indeed increase the quantity demanded for pesos. However, the proposition is also true for supply in that a lower dollar price of peso would reduce the quantity of pesos supplied. Hence the proposition is correct.

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Most popular questions from this chapter

What does it mean to say that a currency is overvalued? undervalued?

If everyone in the world spoke the same language, would the world be closer to or further from being an optimal currency area? Explain.

How important is labor mobility in determining whether an area is an optimal currency area?

Give an example of how a change in the exchange rate alters the relative price of domestic goods in terms of foreign goods.

Under a flexible exchange rate system, if the equilibrium exchange rate is \(0.10 \mathrm{USD}=1 \mathrm{MXN}\) and the current exchange rate is \(0.12=1 \mathrm{MXN},\) will the U.S. dollar appreciate or depreciate? Explain.
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