Which of the following factors is most likely to have caused the change shown in the diagram below? The Market for Malaysian Ringgit

Question

BlackTom AI · Accepted Answer

1) Relevant knowledge points and concepts
- The foreign exchange market: demand for a currency comes from foreigners wanting to buy domestic goods, services or assets; supply of a currency comes from domestic residents wanting foreign goods, services or assets.
- A rightward shift in the demand curve for the Malaysian ringgit (RM) means more foreign agents want RM at every price, raising the equilibrium exchange rate (US$ per RM) and quantity of RM traded — i.e., the RM appreciates against the US dollar.

2) Step-by-step reasoning
- If US residents increase holiday travel to Malaysia, they need RM to pay for hotels, food and activities.
- This raises foreigners’ demand for RM (foreigners = US tourists), shifting the demand curve for RM to the right.
- On the diagram a rightward demand shift produces a higher exchange rate (more US$ per RM) and a larger quantity of RM exchanged.

3) Intermediate steps / directional “calculations”
- Initial equilibrium: D0 intersects S at E0 (exchange rate R0, quantity Q0).
- After shock (more US tourists): demand → D1 (right of D0).
- New equilibrium: D1 ∩ S at E1 → exchange rate increases (R1 > R0), quantity increases (Q1 > Q0).

4) Why the correct answer is correct
- Option c (“US demand for holidays in Malaysia increases”) directly increases foreign demand for RM (needed to spend in Malaysia). That is exactly the mechanism shown by the demand curve shifting right and the RM appreciating.

5) Why the other options are incorrect
- a) Lower Malaysian interest rates and higher US rates would encourage capital flows into USD, increasing supply of RM (or reducing demand for RM), not shifting demand right.
- b) Higher relative US purchasing power (lower US inflation vs Malaysia) would reduce foreign demand for Malaysian goods, tending to lower demand for RM.
- d) Faster income growth in Malaysia raises Malaysian demand for imports (foreign currency), increasing supply of RM, not foreign demand for RM.

6) Conclusion
The diagram is best explained by increased US demand for holidays in Malaysia. This matches the provided correct answer: US demand for holidays in Malaysia increases.

Which of the following factors is most likely to have caused the change shown in the diagram below? The Market for Malaysian RinggitSingle choice

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Which of the following factors is most likely to have caused the change shown in the diagram below? The Market for Malaysian RinggitSingle choice

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