Fixed versus floating exchange rates

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Question: Fixed versus floating exchange rates: Suppose Mexico wishes to fix its exchange rate relative to the U.S. dollar.

(a) If the Federal Reserve raises interest rates, what would happen to the peso-dollar exchange rate in the absence of any change in Mexican interest rates?

(b) Suppose Mexico wants to keep its interest rate fixed no matter what, maintain a fixed exchange rate, and allow open capital markets. What will happen when the United States raises interest rates?

(c) Summarize what you learn from this exercise.

Reference no: EM131634772

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