Question

In an effort to stimulate the economy, the United States Federal Reserve decides to cut interest rates. The Mexican government does
not alter its interest rates, which stand higher than those rates of the United States. What is the likely short-term effect on the value
of each nation's currency?
es
A)
B)
The value of the dollar will appreciate and the value of the peso will
appreciate.
The value of the dollar will appreciate and the value of the peso will
depreciate
The value of the dollar will depreciate and the value of the peso will
depreciate
C)
D)
The value of the dollar will depreciate and the value of the peso will
appreciate

Answer 1

Answer: D)  The value of the dollar will depreciate and the value of the peso will  appreciate.

Explanation:

Interest rates are directly related to the value of a currency because a higher interest attracts investors who would then demand more of the currency and push the value up.

With the Fed cutting interest rates, the dollar will depreciate in value by this logic. The Mexican Peso will appreciate because investors will demand more of it relative to the Dollar as their interest rates did not drop.