Exchange rate (dollars/pesos) S2 E2 S1 E1 Quantity of pesos The Mexican Foreign
ID: 1127172 • Letter: E
Question
Exchange rate (dollars/pesos) S2 E2 S1 E1 Quantity of pesos The Mexican Foreign Exchange Market (FEM) is shown above. Use the graph to answer the next three questions 31. If the initial equilibrium is at E1, then at E2, the Mexican peso: a. Has appreciated. b. Has depreciated. c. Has not changed in value. d. Can buy fewer dollars. 32. To move the exchange rate from El to E2, the central bank of Mexico should: a. Buy foreign bonds with no sterilization. b. Sell foreign bonds with no sterilization. c. Practice speculative attack on the US dollar. d. Practice sterilized interventions. To move the exchange rate from El to E2, the central bank of Mexico has: a. Increased its Monetary Base b. Decreased its Monetary Base. c. Practiced speculative attack on the US dollar. d. Practiced sterilized intervention. 33.Explanation / Answer
31.
As it can be seen in the diagram when the economy moves from exchange rate E1 to exchange rate E2, it means the demand for peso has increased, so the peso will appreciate, it means at E2 exchange rate a given peso can purchase more dollar.
Hence option a is the correct answer that the peso has appreciated at E2.
32.
As it can be seen in the diagram when the economy moves from exchange rate E1 to exchange rate E2, it means the Central Bank of Mexico sell more foreign bonds, so the demand for dollar decreases because by selling more foreign bonds government will get more dollar and the government will convert the dollar into peso, so the demand for peso will increase and Demand curve of peso will shift rightward and hence economy will move from E1 to E2.
Hence option b is the correct answer.
33.
If the Central bank of Mexico wants to move from E1 to E2, then it should decrease the Monetary Base, therefore the money supply will decrease and interest rate will increase in Mexico and therefore more capital will come in Mexico due to higher interest rate and therefore the demand for the peso will increase and therefore it will appreciate and the further economy will move from E1 to E2.
Hence option b is the correct answer.
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