Question

1. Suppose the inflation rate in Mexico decreases relative to the US. We would predict that:

	A.	The exchange rate of Dollars/Peso would rise and the equilibrium amount of Pesos would rise.
	B.	The exchange rate of Dollars/Peso would fall and the equilibrium amount of Pesos would rise.
	C.	The exchange rate of Dollars/Peso would fall and the equilibrium amount of Pesos would fall.
	D.	The exchange rate of Dollars/Peso would rise and the equilibrium amount of Pesos would rise, fall or stay the same.

2. Recent headlines (July 17, 2020) from the Brookings institution https://www.brookings.edu/research/fed-response-to-covid19/ asks “What’s the Fed doing in response to the COVID-19 crisis?” In the article they note that the Federal Reserve has taken steps which have pushed interest rates near zero. Ceteris paribus, from a US-Mexico perspective, we would predict:

	A.	the Peso/Dollar exchange rate will rise; the equilibrium quantity of dollars could rise, fall or stay the same.
	B.	the Peso/Dollar exchange rate will rise; the equilibrium quantity of dollars will rise.
	C.	the Peso/Dollar exchange rate will fall; the equilibrium quantity of dollars will rise.
	D.	the Peso/Dollar exchange rate could rise, fall or stay the same; the equilibrium quantity of dollars will rise.
	E.	the Peso/Dollar exchange rate will fall; the equilibrium quantity of dollars could rise, fall or stay the same.

3. A recent headline announced “Euro to US Dollar (EUR/USD) Exchange Rate Falls as Eurozone Economic Activity Stalls”, Posted by David Moore, on September 23, 2020 in https://www.euroexchangeratenews.co.uk/euro-to-us-dollar-eur-usd-exchange-rate-falls-as-eurozone-economic-activity-stalls-30105 . A US consumer/tourist will view this as _____ and a European consumer/tourist will see it as ______. US exporting business will see this as _____ and a European exporting business will see this as ______. A US investor in Europe will see this as ______ and a European investor in the US will see this as ______.

	A.	unfavorable; favorable; unfavorable; favorable; unfavorable; favorable.
	B.	favorable; unfavorable; favorable; unfavorable; unfavorable; favorable.
	C.	favorable; unfavorable; unfavorable; favorable; unfavorable; favorable.
	D.	favorable; unfavorable; unfavorable; favorable; unfavorable; favorable.
	E.	unfavorable; favorable; unfavorable; favorable; favorable; unfavorable.

Answer 1

1. A. The exchange rate of Dollars/Peso would rise and the equilibrium amount of Pesos would rise.
(Demand for Mexican goods will rise which will increase the demand for pesos which increase exchange rate and equilibrium quantity of pesos.)

2. C. the Peso/Dollar exchange rate will fall; the equilibrium quantity of dollars will rise.
(Supply of dollar will rise due to which exchange rate will fall and quantity will rise.)

3. favorable; unfavorable; unfavorable; favorable; unfavorable; favorable
(Option C and D are same. They are correct. US consumer will like this but european tourist will not. US exporting business will not like this but european exporting business will. US investor will not like this but european investor will.)