If American demand for purchases of Mexican goods has increased, ...

[scienceeasy]

If American demand for purchases of Mexican goods has increased, how would you expect the equilibrium exchange rate in the market for dollars to respond? Support your answer graphically.
 
  What will be an ideal response?

Question 2

Explain and show graphically how an increase in incomes in the United States will affect equilibrium in the foreign exchange market?
 
  What will be an ideal response?

[millet]

Answer to Question 1

If Americans are demanding more Mexican goods, they must trade their dollars in the foreign exchange market for pesos. This increase in the supply of dollars is represented by the shift to the right of the supply curve for dollars below. As the supply of dollars increases, the equilibrium exchange rate falls (the dollar depreciates).

Answer to Question 2

Higher incomes in the United States will increase demand for imports in the United States. The increased demand for imported goods will result in an increase in the supply of dollars (shift the supply curve to the right) as Americans trade in their dollars for the currencies of the countries from which they wish to purchase goods. The increase in supply results in a decrease in the equilibrium exchange rate (the dollar depreciates), and an increase in the equilibrium quantity of dollars traded.