Assume that,as was the case in 1994,Mexican goods are 22 percent more expensive than U.S.goods.If capital markets are fully liberalized and the Central Bank of Mexico is committed to a pegged peso/dollar exchange rate,then:

Question

Quizplus · Accepted Answer

If Mexican goods are 22 percent more expensive than U.S. goods, it suggests that the peso is overvalued. Therefore, foreign investors are likely to perceive this and start to withdraw short-term capital from Mexico. To control the outflow of capital, the central bank is likely to raise interest rates. Thus, all of the above options are likely to happen in such a scenario.

Assume That,as Was the Case in 1994,Mexican Goods Are 22