(a) (2) Using the monetary model of exchange rate determination, discuss what will happen to the exchange rate between the Mexican peso and the US dollar, Epeso/dollarin the following scenario:

Banamex, the largest Mexican bank, is about to file for bankruptcy, which prompts the Mexican government to issue government bonds in order to finance a bailout for Banamex,thus increasing the Mexican expected rate of inflation.

(b) (2) The monetary model of exchange rate determination implicitly assumes that real rates of return across countries are equalized. Is this a reasonable assumption in the US-Mexico case? Explain.