Question

value of currency depending upon prices by supply and demand. The deviation happens due to a few factors like sticky consumer price, inflation, exports. 4. Suppose that the U.S. inflation rate is expected to be 1.5%, and the Mexican inflation rate is expected to be 4.5% in 2020. The exchange rate between the U.S. dollar and the Mexican peso will_ _ (rise, fall, remain unchanged) by __%, if the PPP theory of exchange rate determination holds true. 5. Suppose that the U.S. money growth rate is expected to be 3.0%, and the Mexican money growth rate is expected to be 7.0% in 2020. According to the monetarist approach to the exchange rate determination, the exchange rate between the U.S. dollar and the Mexican peso will_ (rise, fall, remain unchanged) by __%.

Answer 1

4.As per PPP Future Exchange rate =Spot Exchange Rate *(1+US currency)/(1+Mexican Currency) =Spot Rate *(1+1.5%)/(1+4.5%)
So Change in Exchange rate =(1+1.5%)/(1+4.5%)-1 =-2.87%
The Exchange rate will fall by 2.87%

5. Change in exchange rate =(1+3%)/(1+7%)-1 =-3.74%
The Exchange rate will fall by 3.74%