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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Many developing countries, like Mexico, have moderate to high rates of inflation. At the same time, international trade plays an Important role In their economies. What type of exchange rate regime would be best for such a country’s currency vis ô vis the U.S. dollar?

To determine

The type of exchange rate regime that would be best for countries that have moderate to high inflation and have importance of international trade in their economies.

Explanation

The exchange rate between two countries in real terms gives Real Exchange Rate. It is the product of the relative prices of the trading nations and nominal exchange rate.

The formula for real exchange rate between, say, Mexican Peso and US dollar is:

Real exchange rate=PfPXewhere,Pf=pricelevelinUSP=pricelevelinMexicoe=exchangerate

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