Ix Mexico is experiencing nign inflation while Canada is enjoying la steady GDP and stable inflation.. What should happen in the foreign exchange market? A square a depreciation of Mexico's currency B square a decrease in the supply of Mexico's currency C square a decrease in the demand for Canada's currency D square an increase in the supply for Canada's currency an increase in the demand for Mexico's currency

To determine what should happen in the foreign exchange market given the economic conditions in Mexico and Canada, we need to understand the implications of inflation and GDP growth on currency values.<br /><br />1. **Inflation in Mexico**: High inflation in Mexico means that the purchasing power of the Mexican currency (Mexican Peso) is decreasing. This typically leads to a decrease in the demand for the Mexican Peso because it loses value relative to other currencies.<br /><br />2. **Stable GDP and Inflation in Canada**: A stable GDP and stable inflation in Canada suggest economic stability. This generally makes the Canadian currency (Canadian Dollar) more attractive to investors and traders, leading to an increase in the demand for the Canadian Dollar.<br /><br />Given these points, the correct answer is:<br /><br />C $\square$ a decrease in the demand for Canada's currency<br /><br />This option is incorrect because, with stable GDP and inflation, the demand for Canada's currency would likely increase, not decrease.<br /><br />The correct answer should be:<br /><br />A $\square$ a depreciation of Mexico's currency<br /><br />This is because high inflation in Mexico would lead to a depreciation of the Mexican Peso in the foreign exchange market.