Suppose that Mexican investors decide to pour money (invest) into the US fracking industry. Assume that the US and Mexico have floating currency regimes.
a) Graph the US and HOME starting with BOP=0 at e1. Next, explain and show on the graph the changes that follow the Mexican firms' investment decision. What happens to the exchange rate? (Label all parts of the graph, and explain each change)
b) Now graph and explain what happens in Mexico for the same set of facts (i.e., graph Mexico as HOME) (Label all parts of the graph, and explain each change.)