Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that 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

Quizplus · Accepted Answer

An increase in inflation and interest rate will put downward pressure on the value of Mexican peso. However, since the total value of investment transactions between U.S. and Mexico is minimal, the impact of these factors on the value of Mexican peso may be less significant. Moreover, the inflation effect should be more pronounced than the interest rate effect as it will reduce the purchasing power of the currency and make its exports more expensive.

Assume That the Total Value of Investment Transactions Between U