Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the 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.
A) downward; more
B) upward; more
C) downward; less
D) upward; less

Question

Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the 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.​
A) ​downward; more
B) ​upward; more
C) ​downward; less
D) ​upward; less

Quizplus · Accepted Answer

The increase in inflation and interest rates in Mexico will put downward pressure on the value of the Mexican peso. However, the inflation effect will be more pronounced than the interest rate effect. This is because higher inflation reduces the purchasing power of the peso and makes it less attractive to foreign investors, which causes the demand for the peso to decrease and its value to fall. On the other hand, higher interest rates could attract foreign investors to invest in Mexico, which could increase the demand for the peso and its value. However, since the total value of investment transactions between US and Mexico is minimal, the impact of higher interest rates on the peso is likely to be limited. Therefore, the inflation effect is expected to have a greater impact on the value of the peso.

Assume That the Total Value of Investment Transactions Between United