Why Might Mexico Choose to Maintain a Fixed Exchange Rate

question 72

Multiple Choice

Why might Mexico choose to maintain a fixed exchange rate to the U.S. dollar?

• A) to help it maintain low and stable inflation
• B) to "import" the reputation of the U.S. Federal Reserve
• C) to maintain exchange rate stability
• D) to reduce exchange risk
• E) All of these answers are correct.

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Definitions:

Short Run

A period in economics during which at least one input, such as plant size, is fixed and cannot be changed.

Long Run

A period in economics where all factors of production and costs are variable, allowing for complete industry adjustment.

Fixed Inputs

Resources or factors of production that cannot be increased or decreased in the short run, often including capital and land.

Cross Elasticity

A measure of how the quantity demanded of one good responds to a change in the price of another good, indicating the substitutability or complementarity between the two goods.