Suppose there is a small decrease in the income level in Mexico and a large decrease...

Suppose there is a small decrease in the income level in Mexico and a large decrease in the U.S. income level. Everything else equal, what is likely to happen to value of the MXN?

Expert Solution

Suppose there is a small decrease in the income level in Mexico and a large decrease in the U.S. income level. Everything else equal, what is likely to happen to value of the MXN?

Ans: When the national income decreases, it leads to production of less goods and services as people demand less. People have less income to spend so they buy less. The demand of the money goes down in that country. Money demand has direct relationship with income level of people in a country.. The lower money demand will decrease the value of money in that country.

In the case stated above, as decrease in income level of people is less in Mexico and more in U.S. So the decrease in value of currency will be less in Mexico then U.S. So, the value of MXN will reduce but reduction will be less as decrease in income level is small in Mexico. In U.S. the reduction in value of currency will be large as decrease in income level is large in U.S.

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