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Explain how each of the following conditions would be expected to affect the value of the...

Explain how each of the following conditions would be expected to affect the value of the Mexican peso.

a. Mexico suddenly experiences a high rate of inflation.

b. Mexico’s interest rates rise, while its inflation is expected to remain low.

c. Mexico’s central bank intervenes in the foreign exchange market by purchasing dollars with pesos.

d. Mexico imposes quotas on products imported from the United States.

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Answer #1

The value will be affected as follows:

a. Mexico suddenly experiences a high rate of inflation.

Value of Peso will fall in relation to other foreign currencies (as per purchase price parity)

b. Mexico’s interest rates rise, while its inflation is expected to remain low.

Value of Peso will fall in relation to other foreign currencies (as per interest rate parity)

c. Mexico’s central bank intervenes in the foreign exchange market by purchasing dollars with pesos.

Value of Peso will fall in relation to other foreign currencies (the bank has increased supply of peso in the market, leading to a fall in its value)

d. Mexico imposes quotas on products imported from the United States.

Value of Peso will increase (since quota will lead to lesser flow of peso in the market i,e reduced supply will lead to increase in value)

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