Let \"e\" be the exchange rate in pesos per dollar. Let E(e) be the expected fut

Question

Let "e" be the exchange rate in pesos per dollar. Let E(e) be the expected future exchange rate in pesos per dollar. In the interest rate parity condition, if the expected future exchange rate, E(e), increases, then the

supply of pesos shifts to the right.

supply of pesos shifts to the left.

demand for pesos shifts to the left.

demand for pesos shifts to the right.

supply of pesos shifts to the right.

supply of pesos shifts to the left.

demand for pesos shifts to the left.

demand for pesos shifts to the right.

Explanation / Answer

Solution: supply of pesos shifts to the right

Explanation: The increase in interest rates raises the rate of return on U.S. assets thus the rate of return on U.S. assets to exceed the rate of return on pesos which will will raise the supply of pesos

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