3. Changes in the foreign-exchange market The following questions focus on the exchange rate between the Malaysian ringgit and the Mexican peso. Assume the exchange rate is flexible. The exchange rate is defined as the number of ringgit you must pay for one peso. Suppose strong economic growth in Malaysia causes Malaysian incomes to increase, while incomes in Mexico remain the same. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal. O Supply of Pesos Demand for Pesos Supply of Pesos RINGGIT PRICE OF PESOS Demand for Pesos QUANTITY OF PESOS The increase in Malaysian incomes causes the Mexican peso to relative to the Malaysian ringgit and causes the Malaysian ringgit to relative to the Mexican peso.Suppose the price level in Mexico rises by 5%, while the price level in Malaysia remains the same. That is, the inflation rate in Mexico is higher than in Malaysia. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos. O Supply of Pesos Demand for Pesos Supply of Pesos RINGGIT PRICE OF PESOS Demand for Pesos QUANTITY OF PESOS Suppose the real interest rates in Malaysia and Mexico are initially the same. Then the real interest rate in Malaysia falls, while the real interest rate in Mexico remains the same. This will cause the supply of pesos to and the demand for pesos to , which causes the Malaysian ringgit to relative to the Mexican peso