Question 3

Draw a graph of the foreign exchange market for Mexican pesos purchased with US dollars. Label the equilibrium exchange rate ER1 and the equilibrium quantity Q1. Show how the graph would change if cars made in Mexico became more popular amount US consumers. Label the new equilibrium exchange rate ER2 and the new equilibrium quantity Q2.

Question 4

Which of the following scenarios would cause the peso to depreciate relative to the dollar?

1. The government of Mexico buys pesos with its reserve of dollars
2. Inflation strikes the United States but not Mexico
3. The interest rate on US Treasury bonds rises significantly
4. Mexican consumers lose their taste for Kentucky bourbon.