Question 20.9

1. The nominal peso–U.S. dollar exchange rate

   The increased purchase of Mexican oil will cause U.S. individuals (and firms) to increase their demand for the peso. To purchase pesos, individuals will increase their supply of U.S. dollars to the foreign exchange market, causing a rightward shift in the supply curve of U.S. dollars. This will cause the peso price of the dollar to fall (the amount of pesos per dollar will fall). The peso has appreciated and the U.S. dollar has depreciated as a result.

2. Mexican exports of other goods and services

   This appreciation of the peso means it will take more U.S. dollars to obtain the same quantity of Mexican pesos. If we assume that the price level (measured in Mexican pesos) of other Mexican goods and services does not change, other Mexican goods and services become more expensive to U.S. households and firms. The dollar cost of other Mexican goods and services will rise as the peso appreciates. So Mexican exports of goods and services other than oil will fall.

3. Mexican imports of goods and services

   U.S. goods and services become cheaper in terms of pesos, so Mexican imports of goods and services will rise.