1) The U.S., Brazil, and Mexico commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting countrys currency. Assume that Brazil decides to peg its currency to the U.S. dollar and the exchange rate will remain fixed. Assume that the Mexican peso appreciates substantially against the U.S. dollar during the next year.

1. What is the likely effect (if any) of the Mexican pesos exchange rate movement over the year on the volume of Brazil 's exports to Mexico? Briefly explain.

2. What is the likely effect (if any) of the Mexican pesos exchange rate movement on the volume of Brazils exports to the U.S.? Briefly explain.