Question

Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?

a) Demand for Argentine pesos decreases; supply of Argentine pesos increases; peso/U.S. dollar exchange rate appreciates.
b) Demand for Argentine pesos increases; supply of Argentine pesos decreases; peso/U.S. dollar exchange rate appreciates.
c) Demand for Argentine pesos decreases; supply of Argentine pesos decreases; peso/U.S. dollar exchange rate depreciates.
d) Demand for Argentine pesos increases; supply of Argentine pesos increases; peso/U.S. dollar exchange rate depreciates.

Answer 1

If Argentina gets inflation under control and the Argentine inflation rate decreases substantially, it will likely lead to an increase in the demand for Argentine pesos, a decrease in the supply of Argentine pesos, and an appreciation of the peso/U.S. dollar exchange rate.

Step-by-step explanation:

If Argentina gets inflation under control and the Argentine inflation rate decreases substantially, it will likely lead to an increase in the demand for Argentine pesos, a decrease in the supply of Argentine pesos, and an appreciation of the peso/U.S. dollar exchange rate.

The decrease in inflation makes the Argentine pesos more desirable to hold, which increases the demand for the currency. At the same time, the decrease in inflation improves the economic outlook for Argentina, leading to a decrease in supply as investors become less willing to sell pesos.

The appreciation of the peso/U.S. dollar exchange rate means that it will take fewer pesos to buy one U.S. dollar, indicating a stronger value of the Argentine peso.