5. 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 exible. The exchange rate is defined as the number of ringgit you must pay for one peso. Suppose an economic downturn in Mexico causes Mexican incomes to decrease, while Malaysian incomes remain unchanged. 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. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. O Supply of Pesos Demand for Pesos O RINGGIT PER PESO Supply of Pesos Demand for Pesos QUANTITY OF PESOS The decrease in Mexican incomes causes the Mexican peso to relative to the Malaysian ringgit and causes the Malaysian ringgit to relative to the Mexican peso.Shift the appropriate curve or curves on the following graph to iiiustrate how this affects the market for Mexican pesos. 0 Supply 0f Pesos Demand for Pesos _n_ Supply of Pesos O m m n. n: m n. l: (D (D Z n: 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 rises, while the real interest rate in Mexioo remains the same. This will cause the supply of pesos to V and the demand for pesos to V , which causes the Malaysian ringgit to V relative to the Mexican peso