Suppose the money supply in Mexico grows more quickly than the money supply in the United States. We would expect that

Question

a. the peso should depreciate relative to the dollar.
b. the peso should appreciate relative to the dollar.
c. the peso should maintain a constant exchange rate with the dollar because of purchasing-power parity.
d. none of the above is true.

Answer 1

The correct answer is:

a. the peso should depreciate relative to the dollar.

When the money supply in Mexico grows more quickly than that in the United States, it typically leads to inflation in Mexico. As a result, the value of the peso would decrease in relation to the dollar, causing the peso to depreciate relative to the dollar.