Exhibit 20-7 Imagine There Are Only Two Countries in the World

Multiple Choice

Exhibit 20-7 Imagine there are only two countries in the world, Mexico and Canada, and two currencies, pesos and Canadian dollars.If Mexico's central bank wants to protect its currency from depreciating in response to the demand shift shown in Exhibit 20-7, which of the following is most likely to be the policy it will choose?

A) increasing the supply of pesos
B) decreasing the supply of Canadian dollars
C) purchasing Canadian dollars with newly issued pesos
D) purchasing pesos with reserves of Canadian dollars
E) selling pesos to Canadians