Question

4) During 1995, the Mexican peso exchange rate rose from 5.33 peso/$ to 7.64 peso/$. At the same time, US inflation was approximately 3% in contrast to Mexican inflation of about 48.7%. a. By how much did the nominal value of the peso change during 1995

Answer 1

The real exchange rate was 7.69 pesos per dollar

while the nominal value changed to 7.64 from 5.33

a total increase of 2.31

Step-by-step explanation:

We solve for the real exchange rate by multipling the spot exchange by the foreing inflation and dividing by the national inflation

`e_p(1+i_f)^t / (1+i_n)^t = e_r\\\\5.33(1+.487)^1 / (1+.03)^1 = e_r\\e_r = 7.694864`