Decide whether the U.S dollar would appreciate or depreciate compared to the mex

Question

Decide whether the U.S dollar would appreciate or depreciate compared to the mexican peso in each scenario. Assume flexible exchange rates.

1. American tourist head to mexican beaches for the spring.

2. Mexico's money supply drops sharply.

3. Taxes on coporations in the U.S are cut. They are now lower for business investment than mexico.

4. Drug violence discourages Americans from traveling to Mexico.

...............

23. The basic type of intervention by central banks under the managed floating exchange rate system is to:

A. The central bank or government simply changes the peg for exchange rates

B. Buy and Sell currencies to influence supply and demand

C. Renegotiate the rate at which foreign currencies can be converted into gold

D. Make pronouncements but then do nothing and let the market set the exchange rate

Explanation / Answer

1. In this case, the value of US dollar would depreciate in comparison to Mexican Peso because when American tourist head to mexican beaches for the spring, the demand for Mexican Peso would be higher in comparison to US dolllar because the tourists would have to pay in Mexican Peso.

2. When Mexico's money supply drops sharply, demand for it would rise incessantly. In this case value of US dollar would depreciate in comparison to Mexican Peso.

3. When  taxes on coporations in the U.S are cut, they are now lower for business investment than mexico, the purchasing capacity of investors and consumers increase. Hence, demand for goods and services increase. Thus, value of US dollar increases in comparison to Mexican Peso.

4.  Drug violence discourages Americans from traveling to Mexico, then demand for Mexican Peso would decrease. Hence, value of US dollar would appreciate in comparison to Mexican Peso

23. The basic type of intervention by central banks under the managed floating exchange rate system is to: Buy and Sell currencies to influence supply and demand

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