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Suppose there is a big drop in interest rates in Mexico and a small drop in U.S. interest rates. Everything else equal, what is likely to happen to value of the MXN?

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bharathparasad577

If we suppose that there is a big drop in the interest rates in Mexico and a small drop in the interest rates in the U.S.A, with everything else equal, the value of MXN will decrease.

The foreign exchange market works according to the principles of firms, households, and investors:

  • These three constituent factors of the foreign exchange market determine the demand and supply patterns in the market.
  • Demand for a foreign currency might increase in the foreign exchange market is linked to the expectation of an increase in the value of a foreign currency.
  • Supply of a foreign currency in the foreign exchange market is linked to an inverse principle, where the expectation of a decrease in the value of foreign currency pushes supply upwards.
  • If we are to suppose that there is a big drop in the interest rates in Mexico and a small drop in the interest rates in the U.S.A., then the value of the MXN will decrease, with everything being equal.
  • A higher interest rate leads to the appreciation of a foreign currency relative to other currencies in the foreign exchange market.
  • A lower interest rate leads to the depreciation of a foreign currency relative to other currencies in the foreign exchange market.

Therefore, if we suppose that there is a big drop in the interest rates in Mexico and a small drop in the interest rates in the U.S.A, with everything else equal, the value of MXN will decrease.

Learn more about the foreign exchange market: https://brainly.com/question/24276072

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