Suppose That Venezuela Pegs Its Bolivar to the Mexican Peso

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The Answer is When Mexican firms begin to expect higher profits in the future, this will lead to an increase in demand for the Mexican peso. As a result, the value of the peso will appreciate relative to the Venezuelan bolivar.

In the IS-LM-FX model, an increase in the value of the peso relative to the bolivar will lead to a decrease in net exports for Venezuela. This is because Venezuelan goods and services will become more expensive for Mexican consumers, leading to a decrease in demand for Venezuelan exports.

Additionally, the appreciation of the peso will also lead to a decrease in the demand for Venezuelan goods and services in the Mexican market, further reducing Venezuela's net exports.

As a result, the decrease in net exports will lead to a decrease in aggregate demand in Venezuela, which will further exacerbate the recession in the country. This can lead to lower output, higher unemployment, and lower overall economic activity in Venezuela.

Overall, the expectation of higher profits in Mexico will lead to a decrease in net exports and a worsening of the recession in Venezuela, as per the IS-LM-FX model.

Suppose That Venezuela Pegs Its Bolivar to the Mexican Peso

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