Final answer:
The statement that the demand for dollars by Mexicans creates the supply of pesos is true. In the foreign exchange market, transactions between different currencies directly impact supply and demand, with shifts in expectations about future exchange rates influencing equilibrium exchange rates and traded quantities.
Step-by-step explanation:
The question asks whether it is true that the demand for dollars by Mexicans creates the supply of pesos. This statement is true. In the foreign exchange market, the demand for one currency (in this case, dollars) matches the supply of another currency (here, pesos), as the two are exchanged. When Mexicans demand dollars, they are implicitly supplying pesos to the market because they must exchange their pesos for dollars. This transaction is captured in a graphic representation, where a demand curve for one currency intersects with a supply curve for another currency at an equilibrium point.
In the given scenario with the Mexican peso and the U.S. dollar, an equilibrium exchange rate of 10 cents per peso corresponds to a quantity of 85 billion pesos. This exchange rate reflects a balance between the demand for dollars—which becomes the supply of pesos—and the supply of dollars—which represents the demand for pesos in this case.
Several factors can cause these demand and supply curves to shift. Expectations of future exchange rates can be a substantial influence. If investors believe the peso will increase in value (appreciate), demand for the peso will increase (shifting the demand curve to the right), and the supply of pesos in the market will decrease (shifting the supply curve to the left). The result can be an increase in the equilibrium exchange rate of pesos measured in dollars and a change in the equilibrium quantity traded.