There is demand for and supply of dollars and a demand for and supply of pesos. Under a flexible exchange rate system, if income growth in the United States is greater than income growth in Mexico, then the

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07-07-2020
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There is demand for and supply of dollars and a demand for and supply of pesos. Under a flexible exchange rate system, if income growth in the United States is greater than income growth in Mexico, then the

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francocanacari francocanacari · Answer 1 · 2020-07-12T07:06:42+02:00

Answer:

There is demand for and supply of dollars and a demand for and supply of pesos. Under a flexible exchange rate system, if income growth in the United States is greater than income growth in Mexico, then the dollar would increase its value over the peso.

Explanation:

Given that in the situation in question the quantities supplied and demanded of both currencies remain stable, in principle there should be no valuation of one over the other for reasons of supply and demand.

Now, since the economic growth in the United States that sustains the value of the dollar is greater than that growth in Mexico that sustains the value of the peso, the greater the value of the dollar in international markets. This will necessarily imply a higher valuation of the American currency, which will widen the gap in the exchange rate with respect to the peso, which instead will remain stable in global markets.