Explanation

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The Foreign Exchange Market illustrates the market for currency. At equilibrium, an exchange rate (ER1) and the global quantity of the currency is determined.

In this space, an explanation of the desired shift will appear.

If Americans want to travel to Mexico, the demand for pesos will increase. By trading in dollars for pesos, the supply of dollars in the foreign exchange market will also increase. The peso will appreciate and the dollar will depreciate.

If Americans do not want to travel to Mexico, then the demand for pesos will decrease. Dollars will not be traded for pesos, decreasing the supply of dollars in the foreign exchange market. The dollar will appreciate and the peso will depreciate.

If Mexicans want to travel to America, the demand for dollars will increase. By trading in pesos for dollars, the supply of pesos in the foreign exchange market will also increase. The peso will depreciate and the dollar will appreciate.

If Mexicans do not want to travel to America, then the demand for dollars will decrease. Pesos will not be traded for dollars, decreasing the supply of pesos in the foreign exchange market. The dollar will depreciate and the peso will appreciate.

If there is inflation in Mexico, Mexican will want to consume American goods to purchase at a lower price level. Therefore, the demand for dollars will increase. By trading in pesos for dollars, the supply of pesos in the foreign exchange market will also increase. The peso will depreciate and the dollar will appreciate.

If there is no inflation in Mexico, Mexicans will want to consume Mexican goods to purchase at a lower price level. Therefore, the demand for dollars will decrease. Pesos won’t be traded for dollars, so the supply of pesos in the foreign exchange market will also decrease. The dollar will depreciate and the peso will appreciate.

If there is inflation in the United States, Americans will want to consume Mexican goods to purchase at a lower price level. Therefore, the demand for pesos will increase. By trading in dollars for pesos, the supply of dollars in the foreign exchange market will also increase. The peso will appreciate and the dollar will depreciate.

If there is no inflation in the United States, Americans will want to consume American goods to purchase at a lower price level. Therefore, the demand for pesos will decrease. Dollars won’t be traded for pesos, so the supply of dollars in the foreign exchange market will also decrease. The dollar will appreciate and the peso will depreciate.

If Mexicans have an increase in income, they will start consuming more American goods. This will increase the demand for dollars. By trading in pesos for dollars, the supply of pesos in the foreign exchange market will also increase. The peso will depreciate and the dollar will appreciate.

If Mexicans have a decrease in income, they will start consuming less American goods. This will decrease the demand for dollars. Pesos won’t be traded for dollars, so the supply of pesos in the foreign exchange market will also decrease. The dollar will depreciate and the peso will appreciate.

If Americans have an increase in income, they will start consuming more Mexican goods. This will increase the demand for pesos. By trading in dollars for pesos, the supply of dollars in the foreign exchange market will also increase. The peso will appreciate and the dollar will depreciate.

If Americans have a decrease in income, they will start consuming less Mexican goods. This will decrease the demand for pesos. Dollars won’t be traded for pesos, so the supply of dollars in the foreign exchange market will also decrease. The dollar will appreciate and the peso will depreciate.

Americans will want to buy bonds at the higher foreign interest rate. Therefore, the demand for pesos will increase. By trading in dollars for pesos, the supply of dollars in the foreign exchange market will also increase. The peso will appreciate and the dollar will depreciate.

Americans will not want to buy bonds at the lower foreign interest rate. Therefore, the demand for pesos will decrease. Since dollars aren’t being traded for pesos, the supply of dollars in the foreign exchange market will also decrease. The dollar will appreciate and the peso will depreciate.

Mexicans will want to buy bonds at the higher American interest rate. Therefore, the demand for dollars will increase. By trading in pesos for dollars, the supply of pesos in the foreign exchange market will also increase. The peso will depreciate and the dollar will appreciate.

Mexicans will not want to buy bonds at the lower American interest rate. Therefore, the demand for dollars will decrease. Since pesos aren’t being traded for dollars, the supply of pesos in the foreign exchange market will also decrease. The dollar will depreciate and the peso will appreciate.