Suppose the money supply in Mexico grows more quickly than the money supply in the USA. We would expect that
A) the Mexican peso should appreciate relative to the US dollar.
B) the Mexican peso should depreciate relative to the US dollar.
C) none of these answers
D) the Mexican peso should maintain a constant exchange rate with the US dollar because of purchasing power parity.

Question

Quizplus · Accepted Answer

If the money supply in Mexico grows more quickly than the money supply in the USA, it would lead to an increase in the supply of pesos in the foreign exchange market. This would result in a depreciation of the Mexican peso relative to the US dollar as there would be more pesos available for a smaller amount of US dollars.

Suppose the Money Supply in Mexico Grows More Quickly Than