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Slide 1
The original equilibrium, E0, occurs at a price of 8 pesos/dollar and a quantity of 8.5 billion dollars.
When interest rates rise in the United States as compared with Mexico, financial investments in the United States promise a higher return than they previously did.
As a result, more investors will demand U.S. dollars so that they can buy interest-bearing assets and fewer investors will be willing to supply U.S. dollars to foreign exchange markets.
Demand for the U.S. dollar will shift to the right, from D0 to D1.
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