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How each of the following conditions would be expected to affect the value of the Mexican...

  1. How each of the following conditions would be expected to affect the value of the Mexican peso (whether peso appreciate or depreciate): justify your answer (Points:2)
  1. Mexico suddenly experiences a high rate of inflation:
  2. Mexico’s interest rates rise, while its inflation is expected to remain low:
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Answer #1

Answer: a: if the inflation rate increases it will depreciate the value of Mexican currency (Peso) because higher inflation rate means prices are high it leads to fall in the purchasing power of currency which reduces value of currency. So, if Mexico experiences high inflation the value of its currency will decrease which means peso depreciates against other currencies.

Answer: b. the increase in interest rate and low inflation rates will lead to increase in the value of peso. The low inflation means the price level is low and the purchasing power of currency is high and also the high interest rate will increase demand for peso which will lead to appreciation of peso

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