From $1988$ to $1994$ Mexico pegged its currency, the peso $($MXN$),$ to the US dollar to stabilize its rampant inflation. Currency pegging is a progress by which the Mexico government commits maintain a relatively fixed exchange rate between $MxN$ and USD $($the exchange rate was allowed to fluctuate within a narrow band$).$ During this period, inflation in Mexico declined from more that $150\%$ to around $10\%.$ Nevertheless, the inflation in Mexico remained still significantly above the US inflation $($which at the time was around $4\%).$ The expectation was that with the peso pegged to the USD, the inflation in Mexico should have gone down to a level similar to the one in the US$.$

Everything else equal, what should have been the effect of the higher inflation in Mexico relative to the US on the demand and supply of pesos at that time?

Answer:

Type one of the following choices: A$,$ B$,$ C$,$ D$,$ E$,$ F$,$ G$,$ H or I

$A=$ Demand of MXN increases, supply of MXN increases

$B=$ Demand of MXN increases, supply of MXN decreases

$C=$ Demand of MXN increases, supply of MXN doesn't change

$D=$ Demand of MXN decreases, supply of MAN increases

$E=$ Demand of MXN decreases, supply of MXN decreases

$F=$ Demand of MXN decreases, supply of MXN doesn't change

$G=$ Demand of MXN doesn't change, supply of MXN increases

$H=$ Demand of MXN doesn't change, supply of MXN decreases

I $=$ Demand of MXN doesn't change, supply of MXN doesn't change