Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+e, bln dollars per week and the demand curve is 140-ebln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates ymore than 20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142-e and the supply of dollars falls to 99+e How should the central bank of Mexico react to this change? O A. start selling U.S. dollars to support the exchange rate O B. start buying U.S. dollars to support the exchange rate O C. reduce money supply in the economy O D. do nothing QUESTION 4 Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e bln dollars per week and the demand curve is 155 -e bln dollars per week. The central bank still commits to its pledge to support the exchange rate if Peso depreciates by over 20% from the original level (more specifically, in this case the fixed exchange rate will be 20% higher than the original level). To maintain the fixed exchange rate, the central bank will have to spend billion dollars of foreign exchange reserves per week. Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "%". If your answer is a negative number, type a dash in front of your answer, i.e, "-999.99".
Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+e, bln dollars per week and the demand curve is 140-ebln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates ymore than 20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142-e and the supply of dollars falls to 99+e How should the central bank of Mexico react to this change? O A. start selling U.S. dollars to support the exchange rate O B. start buying U.S. dollars to support the exchange rate O C. reduce money supply in the economy O D. do nothing QUESTION 4 Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e bln dollars per week and the demand curve is 155 -e bln dollars per week. The central bank still commits to its pledge to support the exchange rate if Peso depreciates by over 20% from the original level (more specifically, in this case the fixed exchange rate will be 20% higher than the original level). To maintain the fixed exchange rate, the central bank will have to spend billion dollars of foreign exchange reserves per week. Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "%". If your answer is a negative number, type a dash in front of your answer, i.e, "-999.99".
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter19: International Finance And The Foreign Exchange Market
Section: Chapter Questions
Problem 5CQ
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Transcribed Image Text:Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+e.
dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso
depreciates by more than 20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142 - e and the supply of dollars
bln dollars per week and the demand curve is 140 -e bln
falls to 99+e.. How should the central bank of Mexico react to this change?
O A. start selling U.S. dollars to support the exchange rate
O B. start buying U.S. dollars to support the exchange rate
O C. reduce money supply in the economy
O D. do nothing
QUESTION 4
Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e.
per week. The central bank still commits to its pledge to support the exchange rate if Peso depreciates by over 20% from the original level (more specifically, in this case the fixed exchange
rate will be 20% higher than the original level). To maintain the fixed exchange rate, the central bank will have to spend
bln dollars per week and the demand curve is 155 - e bln dollars
billion dollars of foreign exchange reserves per week.
Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as
"999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it.
In case of percentages, do not type in the percentage symbol "%". If your answer is a negative number, type a dash in front of your answer, i.e, "-999.99".
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