Assume that, under a system of ﬂoating exchange rates, Mexicans decide to increase their investments in the United States. As a result,

Question

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When Mexicans increase their investments in the United States, they need to convert their pesos into dollars to make these investments. This increases the demand for dollars and decreases the demand for pesos. As a result, the value of the peso will depreciate relative to the dollar, and the value of the dollar will appreciate relative to the peso.

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