Problem 3 What does it mean to say that th... [FREE SOLUTION]

Chapter 22: Problem 3

What does it mean to say that the U.S. dollar has depreciated in value in relation to the Mexican peso? What does it mean to say that the Mexican peso has appreciated in value relative to the U.S. dollar?

Short Answer

Expert verified

If the U.S. dollar has depreciated in value in relation to the Mexican peso, it means one U.S. dollar can buy less of the Mexican peso than it could before. On the other hand, if the Mexican peso has appreciated in value relative to the U.S. dollar, it means one Mexican peso can buy more of the U.S. dollar than it could previously.

Step by step solution

Understanding Currency Depreciation

Currency depreciation is when the value of a certain currency drops in comparison to another currency. In this case, if the U.S. dollar has depreciated in value relative to the Mexican peso, it simply means that the value of one U.S. dollar can now buy less of the Mexican peso than it could previously. This could be due to various economic factors such as differences in interest rates, inflation rates, political stability, economic performance and so on.

Understanding Currency Appreciation

Currency appreciation is the exact opposite of currency depreciation. It means that the value of a certain currency has increased in comparison to another. So if the Mexican peso has appreciated in value relative to the U.S. dollar, it means that now one Mexican peso can buy more of the U.S. dollar than it could previously. The factors that lead to appreciation could be the same as those which lead to depreciation- only in reverse.