9. Suppose that cars produced in Korea are considered inferior goods to American

Question

9. Suppose that cars produced in Korea are considered inferior goods to American consumers. With the U.S. economy out of a recession, this will cause the demand for Korean cars to increase. What will be the impact in the foreign exchange market of U.S. dollars and the Korean won? A) The demand for won will increase and the supply of dollars will increase. B) The demand for won will decrease and the supply of dollars will decrease. C) The demand for won will increase and the supply of dollars will decrease. D) The demand for won will decrease and the supply of dollars will increase.

Explanation / Answer

A) The demand for won will increase and the supply of dollars will increase.

When demand for Korean cars increases then Americans need won to purchase cars so demand of won in the foreign exchange market increases. To purchase won, US has to supply dollars so supply of dollars will increase.

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