Question

Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate, other things equal: LO3 a. The United States unilaterally reduces tariffs on Mexican products. b. Mexico encounters severe inflation. c. Deteriorating political relations reduce American tourism in Mexico. d. The U.S. economy moves into a severe recession. e. The United States engages in a high-interest-rate monetary policy. f. Mexican products become more fashionable to U.S. consumers. g. The Mexican government encourages U.S. firms to invest in Mexican oil fields. h. The rate of productivity growth in the United States diminishes sharply.

Answer 1

A. Appreciate - Mexican goods cheaper, US demand increase

B. Depreciate - high inflation raises price Mexican goods and US demand falls. Supply increases due to cheaper US goods

C. Depreciate - reduction of tourism reduces demand for peso

D. Depreciation - recession reduces imports from ME and decreases demand

E. Depreciate - high interest rate attract ME investors. Increase demand for US dollar and supply peso

F. Appreciate - US purchase pesos to invest in ME. Demand increases

H. Appreciate - decline in productivity reduces US investment. Decrease supply of pesos

Step-by-step explanation:

The U.S demand for Mexican pesos is downward sloping which implies negative relation between exchange rate (price of per unit mexican pesos in terms of dollars) and demand for mexican pesos. When this price increases (U.S currency depreciates) the import from Mexico becomes expensive by U.S residents, therefore they would import less and hence lower demand of mexican pesos. Similarly the import from Mexico increases this implies more demand of mexican pesos when price of mexican pesos falls (U.S currency appreciates).

The supply of Mexican pesos to Americans is upward sloping because of positive relationship between price of mexican pesos in terms of U.S dollars and supply of mexican peso. when this price increases (U.S currency depriciates) the mexican people would demand more of U.S goods, therefore export of U.S to Mexico increases that means more supply of mexican pesos to Americans. Similarly, when this price falls (U.S currency appreciates) the U.S goods to Mexico becomes more expensive, this causes fall in the export and therefore supply of...

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