You have been hired as a consultant to the central bank for…
You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?
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(5 points) Real Exchange R Over the course of the last year, the Mexican peso, P, has changed in value from S(P/$) = 9.2 to S(P/$) = 9.8. Over the same period, the Mexican price index rose from 156.1 to 164.5 and the U.S. price index rose from 131.2 to 135.0 (price index 1990 = 1.00). a. (2 points) Over this time period did the US$ appreciate or depreciate against the peso in nominal terms? Calculate the percentage change in the nominal value of the dollar. b. (3 points) Determine the percentage change in real exchange rate R(P/$) over this period. Are Mexican goods more or less expensive in $ terms than one year ago? What would have happened to the competitiveness of Mexican goods relative to U.S. goods?
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