The Mexican economy is predicted to average double digit inflation over the next two years of 10% per annum. The inflation forecast for the US is 4% per annum. If the current exchange rate is $0.091/peso, what will be the exchange rate two years from now?

Question

Quizplus · Accepted Answer

The calculation is as follows:
After the first year, the Mexican peso will depreciate by 10% against the US dollar, so the exchange rate will be: $0.091/peso * (1 + 0.10) = $0.1001/peso.
After the second year, the peso will depreciate by another 10%, so the exchange rate will be: $0.1001/peso * (1 + 0.10) = $0.11011/peso.
However, we need to consider that the US dollar will also experience inflation of 4% per annum. So, we need to adjust the exchange rate for the difference in inflation rates. The effective exchange rate will be: $0.11011/peso / (1 + 0.04) = $0.105725/peso.
Therefore, the exchange rate two years from now will be $0.105725/peso, which is approximately equal to $0.08134.

The Mexican Economy Is Predicted to Average Double Digit Inflation