Use the FX market diagram to illustrate your answers to the following questions. Consider the relationship between the Mexican peso and the Canadian dollar (C$). Let the exchange rate be defined as Mexican pesos per Canadian dollar, Epesos/C$.

For each of the following cases, illustrate the effects on the FX market and state how the following variables change:

interest rates in Mexico (ipeso) and Canada (iC$),

the expected rate of return on Canadian and Mexican deposits

the spot exchange rate (Epesos/C$).

Unless otherwise noted, you may assume that the expected exchange rate is unchanged.

a. Canadas interest rate increases.

b. Investors expect peso to appreciate in the future.

c. Canada and Mexico decrease interest rates by the same amount.