Figure 15.1: Mexican Pesos per Dollar

-Refer to Figure 15.1. If the market is illustrated by curves S and D₁, and the exchange rate is 9 Mexican pesos per U.S. dollar, the Mexican central bank, acting alone, could intervene in the foreign exchange market by

Question

Figure 15.1: Mexican Pesos per Dollar

-Refer to Figure 15.1. If the market is illustrated by curves S and D₁, and the exchange rate is 9 Mexican pesos per U.S. dollar, the Mexican central bank, acting alone, could intervene in the foreign exchange market by

Quizplus · Accepted Answer

Based on the diagram, we can see that when the exchange rate is 9 Mexican pesos per U.S. dollar, the market is in equilibrium at point B0, where the supply and demand for dollars are equal.

To intervene in the foreign exchange market, the Mexican central bank would need to shift the supply curve to the left (i.e., sell dollars). This would cause the exchange rate to increase (i.e., the value of the peso would appreciate relative to the dollar).

From the graph, we can see that a sale of $4 million would shift the supply curve to the left enough to drive the exchange rate from 9 pesos per dollar to around 8.75 pesos per dollar (i.e., from point B0 to point B1). Therefore, the best choice would be to sell $4 million.

Figure 15.1: Mexican Pesos Per Dollar