Question

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that:________.

Answer 1

Answer: If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that: depreciation in the US dollars in terms of pesos.

Step-by-step explanation:

Inflation is a rate at which the mean price level of a group of selected goods and services in an economy increases over a period of time.

• A rise in inflation means that the cost of raw materials increases.
• Then, workers demand higher wages to survive with the higher cost of living.
• This rise in prices can also cause greater volatility and uncertainty.
• It cause the depreciation of the value of currency.

If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that depreciation in the value of US dollars in terms of pesos.

[Currency of Mexico = pesos]