Suppose that currency market for Mexican pesos and Canadian dollars is initially in equilibrium, with 10 pesos trading for 1 Canadian dollar.  Because of a new trade agreement, there has been a shift in the demand for pesos due to a sudden increase in the capital inflow from Canada to Mexico. What is the effect of the capital inflow on the exchange rate of pesos for Canadian dollars?  Explain and show grahically.  On your graph, Quantity of Canadian dollars should be on the vertical axis and the Exchange rate (Mexican pesos per Canadian dollar should be on the vertical axis.

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