Final answer:
During high inflation in Mexico, the demand for the Mexican peso would decline and its supply would rise in foreign exchange markets, leading to depreciation of its exchange rate. The actual impact on the quantity traded could vary.
Step-by-step explanation:
When Mexico experiences a period of high inflation and there is a loss of confidence in their peso as a store of value, it is most likely that the demand for the Mexican peso would decrease, while the supply of pesos in foreign exchange markets would increase.
As a result, the exchange rate of the peso would depreciate. This is illustrated by a shift in demand from Do to D₁, and an increase in supply from So to S₁. During such periods of high inflation, the value and purchasing power of the currency diminish, making international investors less interested in holding it.
This results in a decrease in the equilibrium exchange rate value of the currency, as shown in historical examples where the exchange rate of the peso fell significantly. However, the overall quantity traded of the peso in foreign exchange markets could increase, decrease, or remain unchanged, depending on the relative shifts in the demand and supply curves.