If the rate of return is 1 percent in Mexico and 3 percent in Canada, the

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According to the interest rate parity theory, the exchange rate between two currencies adjusts to equalize the returns on comparable assets in each country. Therefore, if the rate of return is higher in Canada than in Mexico, investors will demand a higher return on their investments in Mexican pesos to compensate for the lower return. This demand for pesos will cause its value to appreciate against the Canadian dollar, resulting in a 2 percent appreciation.

If the Rate of Return Is 1 Percent in Mexico