Question

Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect

Answer 1

Overall, this would put DOWNWARD pressure on the value of Mexican peso.

The inflation effect should be MORE pronounced than the interest rate effect.

Step-by-step explanation:

Since the inflation rate increased in Mexico, their currency (the peso) should devaluate against other foreign currencies like the US dollar. Downward pressure means that the currency will lose purchasing power.

The inflation effect reduces the value of the currency, depreciating it against the US dollar. Since all measures taken by the Mexican government will follow the inflation rate (go behind), the inflation effect will be larger than the interest rate effect.