Question

Explain how the following events, assuming a floating exchange rate, might effect the Mexican peso market.

a. Improvements in Mexican manufacturing technology result in superior guitars, which are sought after by musicians all over the world.

b. International investors are concerned about Mexico's future commercial prospects due to perceptions of political instability surrounding regular elections.

Short answer

The value of the Mexican peso appreciates as demand for the currency increases, resulting in a drop in the peso/dollar exchange rate. The Mexican peso will weaken, causing the peso/dollar exchange rate to rise.

Step-by-step solution

 Advances in Mexican manufacturing technologies  

a. Advances in Mexican manufacturing technologies have boosted demand for guitars around the world. This enhances demand for the Mexican peso on the international market. The value of the Mexican peso appreciates as demand for the currency increases, resulting in a drop in the peso/dollar exchange rate.

Mexico's future commercial prospects 

b. Because international investors are concerned about Mexico's future commercial prospects, demand for Mexican products will fall, resulting in a trade deficit. As a result, the Mexican peso will weaken, causing the peso/dollar exchange rate to rise.