Suppose that Mexico has a fixed exchange rate regime, and value of peso is fixed against the doll...
Suppose that Mexico has a fixed exchange rate regime, and value of peso is fixed against the dollar. If, everything else constant, Mexico starts growing slower than US, how should the Mexico monetary policy react to maintain the fixed exchange rate regime?
Homework Answers
Lower growth in Mexico and higher growth in usa means higher net exports as Mexican demand for usa exports is less Tha usa demand for Mexican exports since usa income rises more than domestic income.Thus Exchange rate tends to fall and peso tends to appreciate.
The central banks should sell foreign exchange to depreciate currency and maintain exchange rate at initial value
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