Question

If the inflation rate in Mexico was twice the rate in the United States, but the Mexican monetary authorities kept the peso-dollar exchange rate almost constant, which of the following would be true?
A. The high inflation rate in Mexico would increase its citizens' purchasing power.B. The high inflation rate in Mexico would mean that its products would cost less overall.C. U.S.-made products would become less attractive to purchase.D. Mexican products would be less expensive, while U.S.-made products would become comparatively more expensive.E. Mexican products would be more expensive, while U.S.-made products would become comparatively less expensive.

Answer 1

Answer:

E. Mexican products would be more expensive, while U.S.-made products would become comparatively less expensive.

Explanation:

Imagine the following scenario:

• MXN: mexican peso

• USD: united states dollar

• There is no cost in shipping or transport

if the fixed relation is 2 MXN = 1 USD. Say you want to buy a TV that costs 200MXN in Mexico or 100USD in the US. That means that buying a TV costs the same in each country.

Now suppose that the TV price in Mexico, due to inflation, changes to MXN 300.

If you had 300MXN in your wallet, you could:

• use MXN 200 to buy 100USD and use those to buy the TV, and have MXN 100 left, to buy other stuff.
• or
• you could buy the TV in Mexico, you would expend all the money.

That mean that, with the same amount of MXN you can buy more things in the US than in Mexico.

Another way to think about this is.

Say you are a mexican, if there is high inflation, the price of everything will rise, if you considder the exchange rate as another price that means that everything will cost more, except the US Dollar, which will stay in the same price