The following questions focus on the exchange rate between the Russian ruble and the Mexican peso. Assume
Question:
The following questions focus on the exchange rate between the Russian ruble and the Mexican peso. Assume the exchange rate is flexible. The exchange rate is defined as the number of rubles you must pay for one peso. Suppose an economic downturn in Mexico causes Mexican incomes to decrease, while Russian incomes remain unchanged.
Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal.
The decrease in Mexican incomes causes the Mexican peso to (depricate or appreciate) relative to the Russian ruble and causes the Russian ruble to (depreciate or appreciate) relative to the Mexican peso.
Suppose the price level in Mexico rises by 12%, while the price level in Russia remains the same. That is, the inflation rate in Mexico is higher than in Russia.
Suppose the real interest rates in Russia and Mexico are initially the same. Then the real interest rate in Russia falls, while the real interest rate in Mexico remains the same. This will cause the supply of pesos to (decrease or increase) and the demand for pesos to (decrease or increase), which causes the Russian ruble to (appreciate or depreciate) relative to the Mexican peso.
Expert Answer:
The decrease in the Mexican Income decrease the imports of the Mexicans This will reduce the supply ... View the full answer
