Question

Mexico’s currency would tend to depreciate if:

	a.	Sweden's inflation rate rises relative to inflation in the rest of the world.
	b.	the demand for imports by Swedes increases.
	c.	real interest rates in Sweden decrease relative to the rest of the world.
	d.	all of the above.

Answer 1

None of the options is correct.

If Sweden's inflation rate rises, Swedish goods become more expensive, so Sweden increases its imports. For Mexico, its export demand increases which increases the demand for Mexican Peso, and Peso appreciates (Option a is incorrect).

If Sweden increases its imports, for Mexico, its export demand increases which increases the demand for Mexican Peso, and Peso appreciates (Option b is incorrect).

If Sweden's real interest rate decreases, investors will lower investment in Sweden and will increase investment in other countries, including in Mexico, which will increase the demand for Mexican Peso, and Peso appreciates (Option c is incorrect).