Fill in the blank using the words: positive, negative, raise, lower, improving, deteriorating, depreciate, i, Y, appreciate, raising, lowering, contraction, expansion, increase, decrease, higher, lower. During the early-1990s, Mexico maintained an exchange rate peg against the U.S. dollar (assume the peg is hard). When President Zedillo took office in December 1994, he faced several challenges. A combination of the assassination of a presidential candidate and the rebellion in Chiapas had led to an increase in the expected future exchange rate, E° (the market got worried that the exchange rate peg would be abandoned in the future). According to the IS-LM-FX model, an increase in E will the foreign return curve in the FX market. Under a floating exchange rate, this would cause the spot exchange rate to as investors shift deposits out of Mexico expecting a return on U.S. deposits. Of course, this cannot happen under a fixed exchange rate regime (hard peg), which means Banco de Mexico intervenes by the interest rate which requires a monetary ie. in money supply. The new short-run equilibrium is characterized by a higher and lower If the exchange rate regime was a floating regime, the expectational shock would have had a effect on output, by the trade balance.
Fill in the blank using the words: positive, negative, raise, lower, improving, deteriorating, depreciate, i, Y, appreciate, raising, lowering, contraction, expansion, increase, decrease, higher, lower. During the early-1990s, Mexico maintained an exchange rate peg against the U.S. dollar (assume the peg is hard). When President Zedillo took office in December 1994, he faced several challenges. A combination of the assassination of a presidential candidate and the rebellion in Chiapas had led to an increase in the expected future exchange rate, E° (the market got worried that the exchange rate peg would be abandoned in the future). According to the IS-LM-FX model, an increase in E will the foreign return curve in the FX market. Under a floating exchange rate, this would cause the spot exchange rate to as investors shift deposits out of Mexico expecting a return on U.S. deposits. Of course, this cannot happen under a fixed exchange rate regime (hard peg), which means Banco de Mexico intervenes by the interest rate which requires a monetary ie. in money supply. The new short-run equilibrium is characterized by a higher and lower If the exchange rate regime was a floating regime, the expectational shock would have had a effect on output, by the trade balance.
Chapter29: International Finance
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:Fill in the blank using the words: positive, negative, raise, lower, improving, deteriorating, depreciate,
i, Y, appreciate, raising, lowering, contraction, expansion, increase, decrease, higher, lower.
During the early-1990s, Mexico maintained an exchange rate peg against the U.S. dollar (assume the
peg is hard). When President Zedillo took office in December 1994, he faced several challenges. A
combination of the assassination of a presidential candidate and the rebellion in Chiapas had led to
an increase in the expected future exchange rate, E (the market got worried that the exchange rate
peg would be abandoned in the future).
According to the IS-LM-FX model, an increase in Ee will
the foreign return curve
in the FX market. Under a floating exchange rate, this would cause the spot exchange rate to
as investors shift deposits out of Mexico expecting a
return
on U.S. deposits. Of course, this cannot happen under a fixed exchange rate regime (hard peg), which
means Banco de Mexico intervenes by
the interest rate which requires a
monetary
, ie.
in money supply. The new short-run
equilibrium is characterized bya higher
and lower
If the exchange rate regime was a floating regime, the expectational shock would have had a
effect on output, by
the trade balance.
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