12 . Equilibrium changes in the foreign exchange market The following questions focus on the exchange rate between the Malaysian ringgit and the Mexican peso. Assume the exchange rate is flexible. The exchange rate is defined as the number of ringgit you must pay for one peso. Suppose an economic downturn in Mexico causes Mexican incomes to decrease, while Malaysian incomes remain unchanged. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Supply of Pesos Demand for Pesos RINGGIT PRICE OF PESOS Supply of Pesos Demand for Pesos QUANTITY OF PESOS The decrease in Mexican incomes causes the Mexican peso to relative to the Malaysian ringgit and causes the Malaysian ringgit to relative to the Mexican peso. Suppose the price level in Malaysia rises by 10%, while the price level in Mexico remains the same. That is, the inflation rate in Malaysia is higher than In MexicoDrag the appropriate curve or curves on the following graph to illustrate how this affect the market for Mexican pesos. / 0 Supply Of Pesos Demand for Pesos / r Supply of Pesos PINSGIT PRICE OF PESOS QUENTITY OF FEEDS Suppose the real interest rates in Malaysia and Mexico are initially the same. Then the real interest late in Malaysia rises, while the real interest rate in Mexico remains the same. This will cause he supply of pesos to 'V and the demand for pesos to V , which causes 1e Malaysian ringgit to V relative to the Mexican peso