Exhibit 18-7
-Imagine there are only two countries in the world,Mexico and Canada,and two currencies,pesos and Canadian dollars.If Mexico's central bank wants to protect its currency from depreciating in response to the demand shift shown in Exhibit 18-7,which of the following is most likely to be the policy it will choose?

Question

Exhibit 18-7 
-Imagine there are only two countries in the world,Mexico and Canada,and two currencies,pesos and Canadian dollars.If Mexico's central bank wants to protect its currency from depreciating in response to the demand shift shown in Exhibit 18-7,which of the following is most likely to be the policy it will choose?

Quizplus · Accepted Answer

To protect its currency from depreciating in response to the demand shift, Mexico's central bank would want to increase its foreign reserves of the Canadian dollar. By purchasing pesos with its reserves of Canadian dollars, the central bank can increase the demand for pesos, which would increase its value and prevent it from depreciating too much. This policy would also reduce the supply of Canadian dollars, which would further strengthen the peso relative to the Canadian dollar.

Exhibit 18-7 -Imagine There Are Only Two Countries in the World,Mexico and the World,Mexico