Following an increase in Mexican interest rates relative to U.S. interest rates

Question

Following an increase in Mexican interest rates relative to U.S. interest rates (which causes Mexican consumers to borrow abroad to consume domestically), which of the following is expected to occur? a. The dollar would appreciate relative to the peso, and Mexican prices would increase.
b. The dollar would appreciate relative to the peso, and Mexican prices would decrease.
c. The dollar would depreciate relative to the peso, and Mexican prices would increase.
d. The dollar would depreciate relative to the peso, and Mexican prices would decrease.

Explanation / Answer

The dollar would depreciate relative to the peso, and mexican prices would increase.

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