Assume that, under a system of flexible exchange rates, Mexicans decide to increase their investments in Canada.As a result:
A)Canadians will want to buy fewer Mexican goods at the new exchange rate.
B)the peso and the dollar will both depreciate in value.
C)the peso and the dollar will both appreciate in value.
D)the peso will depreciate and the dollar will appreciate in value.

Question

Quizplus · Accepted Answer

If Mexicans increase their investments in Canada, they will need Canadian dollars to purchase Canadian assets. To obtain Canadian dollars, Mexicans will sell pesos on the foreign exchange market, increasing the supply of pesos relative to the demand. This will cause the value of the peso to depreciate. On the other hand, Canadians will need pesos to purchase Mexican goods at the new exchange rate. To obtain pesos, Canadians will sell Canadian dollars, increasing the supply of Canadian dollars relative to the demand. This will cause the value of the Canadian dollar to appreciate. Therefore, the peso will depreciate and the Canadian dollar will appreciate in value.

Assume That, Under a System of Flexible Exchange Rates, Mexicans