Assume that the United States trades exclusively with Mexico and that the exchange rate between the U.S. and the Mexico is flexible.

Assume that Americans desire more goods that are made in the Mexico. Show and explain how this change in demand will affect each of the following:

The demand for U.S. dollars

The international value of the U.S. dollar

Now, assume that there is an increase in real interest rates in the Mexico, but not in the United States. Show and explain how this increase in interest rates will affect each of the following:

The international value of the U.S. dollar

The quantity of U.S. dollars supplied in the foreign exchange market