To encourage more investment,Mexico has lowered its tax rates to reduce the user cost of capital.Argentina is unable to pay back its foreign debts,causing its expected future marginal product of capital to fall.Mexico's real exchange rate will ________ and its net exports will ________.

Question

Quizplus · Accepted Answer

Lowering tax rates in Mexico makes investing in Mexico more attractive, likely appreciating its currency due to increased demand for Mexican assets. Argentina's inability to pay back debts decreases its investment appeal, reducing demand for its currency and likely causing a depreciation relative to Mexico's. An appreciated currency makes a country's exports more expensive and imports cheaper, potentially leading to a fall in net exports.

To Encourage More Investment,Mexico Has Lowered Its Tax Rates to Reduce