Question

3. Questions and Problems 3 When the equilibrium exchange rate rises from, say, 10 cents for one Mexican peso to 12 cents for one Mexican peso, Americans must now pay 8,90,12,10 to buy one peso. It is said that the dollar has depreciated in relation to the Mexican peso. At the same time, the peso has depreciated in relation to the U.S. dollar, as it now takes appreciated instead of to buy one dollar. 8.33,T00,9.83,10 10, 9.83,8.33,100 pesos Grade It Now Save & Continup

Answer 1

Earlier exchange Rate is 10 cents = 1 peso (it means 10 cents is required to buy 1 peso)

Current Exchange Rate is 12 cents = 1 peso (it means 12 cents is required to buy 1 peso)

i) Hence Americans must now pay 12 cents to buy 1 peso

Earlier since 10 cent = 1 peso so 1 cent =1/10 peso i.e 1 cent = 0.1 peso

Now since 12 cent = 1 peso so 1 cent =1/12 peso i.e 1 cent = 0.0833 peso

ii) Clearly we can see that value of one cent with respect to Peso has depreciated as earlier it was 0.1 peso now it is 0.0833 peso.

iii) Since Cent has depreciated it can be said that peso has appreciated with respect to cents. As when one depreciates other appreciates.

iv) 1 dollar is 100 cents so earlier 1 cent = 0.1 peso and now 1 cent = 0..0833 peso. So earlier for 100 cents we required 100*0.1 peso = 10 peso but now we require 100 * 0.0833 peso i.e. 8.33 peso

So now we need 8.33 peso instead of 10 peso to buy one dollar