Question

Exchange Rates

The chart below shows the exchange rate between the U.S. dollar and the Mexican peso in 2015 and 2016. In these questions we’ll focus on changes in 2015.  Note that the chart shows the exchange rate in terms of pesos per dollar.  

Suppose a meal at a restaurant in Mexico City cost 90 pesos in 2015.  Read approximate figures from the chart for the exchange rate in January 2015 and January 2016, and use those figures to answer the following questions.  

FRED- Mexico/ U.S. Foreign Exchange Rate 21 20 19 18 9 9 17 16 으 15 14 13 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Shaded areas indicate U.S. recessions Source: Board of Governors of the Federal Reserve System (US) myf.red/g/iBbS

1.   Based on the exchange rates in January 2015 and January 2016, how many U.S. dollars would it take to buy the restaurant meal in Mexico?  Show your work.

• Dollar price of the restaurant meal in January 2015:  ____________________
• Dollar price of the restaurant meal in January 2016:  ____________________

2.   Based on the data in the chart, would you say that the dollar grew stronger (appreciated) relative to the Mexican peso in 2015, or did it become weaker (depreciate)? Check one answer.

othe dollar grew stronger (appreciated) relative to the Mexican peso in 2015

othe dollar became weaker (depreciated) in 2015

3.   Suppose you’re a Wisconsin farmer who sells corn to consumers in Mexico.  How would the change in the exchange rate in 2015 probably affect your sales of corn to Mexico?  Check one of the following, and then briefly explain your answer:

oas a result of the change in the exchange rate, a U.S. farmer would sell morecorn in Mexico

o  as a result of the change in the exchange rate, a U.S. farmer would sell less corn in Mexico

Answer 1

1) In January 2015, the exchange rate is approximately 15 pesos per dollar . So a meal costing 90 pesos will cost (90/15)= 6 dollars.

In January 2016, the exchange rate is approximately 18 pesos per dollar . So a meal costing 90 pesos will cost (90/18)= 5 dollars.

2) Based on the values in the chart , we can say that the dollar grew stronger(appreciated) relative to the Mexican peso in 2015. This is so because you require less dollar to buy the same product, which has same value in domestic currency.

3) As the dollar has appreciated with respect to peso, as a result of the change in the exchange rate, a US farmer would sell less corn in Mexico, as the cost of importing corn has increased for Mexico and thus, the people in Mexico would import less of corn as their cost price increases. This would result in a decrease in demand and hence the US farmer will be able to sell less of corn in Mexico.