Question

In each case, indicate whether example (a) affects the demand for or supply of Mexican pesos on international markets; (b) shifts demand/supply to the right or the left; (c) causes the currency to appreciate or depreciate.

(1) H&M, a clothing retailer, buys jackets from a Mexican manufacturer.

(2) Discovery of more oil reserves in Mexican waters causes Mexican utilities to decrease their imports of oil from the Middle East.

(3 ) Wealthy Mexicans begin investing heavily the London stock market.

(4) American officials shut down the Mexican border so that US purchases of Mexican goods fall dramatically.

Answer 1

(1)

Purchase of Mexican jacket increases the demand for Peso, keeping its supply unchanged. Peso demand curve shifts to right, increasing exchange rate and increasing quantity of Peso. So Peso will appreciate.

(2)

Lower import demand by Mexico decreases the supply of Peso (since Mexico needs to sell less Peso now to pay for imports). Peso supply curve shifts to left, increasing exchange rate and decreasing quantity of Peso. So Peso will appreciate.

(3)

Mexican investment abroad will increases the supply of Peso (since Mexican investors needs to sell more Peso now to invest in foreign currency-denominated assets). Peso supply curve shifts to right, decreasing exchange rate and increasing quantity of Peso. So Peso will depreciate.

(4)

Lower US purchase of Mexican goods decreases the demand for Peso, keeping its supply unchanged. Peso demand curve shifts to left, decreasing exchange rate and decreasing quantity of Peso. So Peso will depreciate.