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

When a country experiences inflation, their currency tends to decrease in value. This puts downward pressure on the Mexican peso. While interest rate increases can have an impact on currency value, the inflation effect is generally more pronounced. Additionally, the minimal value of investment transactions between the U.S. and Mexico means that the interest rate effect would likely be even less significant in this scenario.

Assume That the Total Value of Investment Transactions Between U