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

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BlackTom AI · Accepted Answer

The diagram shows a rightward shift in the demand curve for RM from RM0 to RM1, with the price (exchange rate) moving upward as a result of the increased quantity demanded at a given price. Now, let's evaluate each option to assess which scenario best explains a rise in the demand for Malaysian Ringgit in this context.

Option a: Incomes in Malaysia are growing at a faster rate than incomes in the US.
If Malaysian incomes rise faster, domestic demand for imports could increase, potentially increasing the supply of RM relative to demand in the foreign exchange market, which might put downward pressure on the RM or have mixed effects depending on capital flows. However, the graph shows a rightward shift in the demand for RM (a stronger demand for RM in exchange markets), not necessarily driven by relative Malaysian income growth alone. This option is not the most direct explanation for a shift in the demand curve for RM in the currency market, making it a weaker fit.

Option b: Inflation in the United States is lower than inflation in Malaysia.
Lower US inflation relative to Malaysia would typically reduce US demand for Malaysian goods and services, potentially reducing the demand for RM as US residents and firms need fewer RM for transactions. It could also imply capital flows the other way if Malaysian assets look relatively riskier or more attractive, but the direct link to increasing demand for RM in the foreign exchange market is not straightforward. This option does not clearly explain a rightward shift in RM demand.

Option c: The Malaysian central bank has decreased interest rates while the US central bank has increased them.
A divergence in interest rates like this tends to influence capital flows. Higher US rates attract investment there, potentially increasing demand for USD and decreasing demand for RM, or vice versa depending on expectations. The described scenario would more plausibly shift demand in the opposite direction or affect the exchange rate rather than causing a clear increase in RM demand on its own. This makes it an unlikely explanation for a rightward shift in RM demand.

Option d: US demand for holidays in Malaysia increases.
An increase in US demand for holidays in Malaysia means more US residents need to exchange USD for Malaysian Ringgit to pay for travel, lodging, and other services in Malaysia. This directly increases the demand for RM in the foreign exchange market, shifting the demand curve for RM to the right, which aligns with the diagram’s presentation of a higher quantity of RM demanded at a given exchange rate. This option provides a straightforward, cause-and-effect rationale for the observed rightward shift in RM demand.

MUF0062 Economics Unit 2 - Semester 2, 2025 Revision Quiz - Currency Exchange Rates (10 - 15 minutes)

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

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