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) Mexican products would be less expensive, while U.S.-made products would become comparatively more expensive.
D) Mexican products would be more expensive, while U.S.-made products would become comparatively less expensive.
E) U) S.-made products would become less attractive to purchase.

Question

Chris Farrell · Accepted Answer

Final Answer : D, Explanation :  If the inflation rate in Mexico is twice that of the United States but the exchange rate remains constant, this means that the purchasing power of the peso has decreased. Mexican products would become more expensive due to inflation, while U.S.-made products would become relatively cheaper. Therefore, Mexican products would be comparatively more expensive than U.S.-made products, leading to a decrease in their demand. This would cause Mexican citizens to have to pay more for goods while U.S. citizens get relatively lower prices, leading to a decrease in Mexican purchasing power.

Definitions

Learning Objectives

Learning Objectives

Related questions