Refer to the diagram. The initial demand for and supply of pesos are shown by D1and S1. Suppose the United States reduces its imports of Mexican goods, shifting its demand for pesos from D1 to D2. If the United States and Mexico were both on the international gold standard:

1) gold would flow from Mexico to the United States.

2) the exchange rate would rise from B dollars equals 1 peso to C dollars equals 1 peso.

3) gold would flow from the United States to Mexico.

4) the exchange rate would fall from B dollars equals 1 peso to A dollars equals 1 peso.

 

FOORQUIZ ANSWER:

1) gold would flow from Mexico to the United States.