Question

2. Read the following (truncated) article and answer questions 2.A - 2.B based on the article (15 points) Bank of Mexico Cuts Rates, as Expected; The central bank is continuing an easing cycle that started in August when inflation moved towards the bank's target Montes, Juan. Wall Street Journal (Online); New York, N.Y. 14 Nov 2019. MEXICO CITY--The Bank of Mexico cut interest rates by a quarter percentage-point Thursday, as expected, continuing an easing cycle that started in August when inflation cased towards the bank's target. In its third consecutive (#09) cut, the Mexican central bank reduced the overnight interest-rate target to 7.5%, its lowest level since June of last year. The decision

Answer 1

1.) In the first quarter if 2019 the GDP growth rate was -0.2%, and the current estimate of the central bank is 0.5%.

2.)

15, y Ye Ye 9, Outpu "ADADA Y'output LM shift

The decline in private and public investment led to a leftward shift of the IS (Investment Savings) curve from ISe to IS1. This causes the a leftward shift of the AD from ADe to AD1 (Aggregate Demand) curve, as the investment component of the AD declines. This causes the  GDP contract from Ye to Y1 (recessionary movement). After the central bank of Mexico has implemented the easing monetary policy, the money supply increases causes the LM (Liquidity-Money) curve to shift to the right, this causes the level of output to increase from Y1 to Y2, and this corresponds to a rightward shift in AD as investments are likely to rise as a result of a decrease in interest rates and a higher level of real money in the economy.

3.) The value of peso-dominated assets will decrease

4.) The peso will depreciate as there will be more peso circulating in the economy and the FX market.

5.)

LM LM BP BP

Under a scenario of flexible exchange rates and imperfect capital mobility (this will determine BP+ or BP-), which seems to be the case here, an expansionary monetary policy will cause the LM curve to shift outward or to the right from LM to LM` at E1 from E0. Given the there is a balance of payment deficit, the currency is likely to depreciate. This depreciation will correspond to greater net exports, which will cause the IS to shift rightward to IS` at E2. Due to the easing domestic assets will lose value and the BP curve ('+' or '-' depending on the mobility of capital) will shift to the right.