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

An increase in the demand curve for Malaysian ringgit (RM) — shown by a rightward shift — raises the exchange rate measured in US$ per RM (more US dollars are needed to buy one RM). This means the RM is appreciating relative to the US dollar. Key concepts: what drives demand for a currency (foreigners need the domestic currency to buy exports, tourist services, or to invest) and what drives supply (residents exchanging domestic currency for foreign currency to buy imports or invest abroad). Also, interest rate differentials and relative income/inflation affect capital and trade flows.

Step-by-step reasoning:
1. The diagram shows demand for RM shifting right → at any given quantity, more US$ are offered to buy RM → equilibrium exchange rate (US$/RM) rises and equilibrium quantity of RM traded increases. So we need a factor that increases foreigners’ desire to hold RM (i.e., increases demand for Malaysian currency).
2. Option b: If US demand for holidays in Malaysia increases, more US tourists need RM to pay for hotels, food and services. This directly increases foreign demand for RM, shifting the demand curve right, producing the observed appreciation and higher quantity. This matches the diagram exactly.
3. Why the others are incorrect:
- Option a: If Malaysian interest rates fall while US rates rise, capital would flow out of Malaysia into US assets. That reduces demand for RM (and increases supply of RM), causing depreciation — the opposite shift.
- Option c: Faster income growth in Malaysia raises Malaysian demand for imports (including US goods), so Malaysians would sell RM to buy foreign currency — increasing supply of RM, not foreign demand for RM, thus not causing a rightward demand shift.
- Option d: If US inflation is lower than Malaysia’s, Malaysian goods become relatively more expensive, lowering foreign demand for Malaysian goods and reducing demand for RM, again opposite to the diagram.

Conclusion: The correct cause is b. US demand for holidays in Malaysia increases. This matches the provided answer.

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

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