Fill in the blank using the words: positive, negative, raise, lower, improving, deteriorating, depreciate, i, Y, appreciate, raising, lowering, contraction, expansion, increase, decrease, higher, lower. During the early-19905, Mexico maintained an exchange rate peg against the U.S. dollar (assume the peg is hard). When President Zedillo took ofce in December 1994, he faced several challenges. A combination of the assassination of a presidential candidate and the rebellion in Chiapas had led to an increase in the expected future exchange rate, if3 (the market got worried that the exchange rate peg would be abandoned in the future). According to the IS-LM-FX model, an increase in EE will the foreign return curve in the FX market. Under a oating exchange rate, this would cause the spot exchange rate to as investors shift deposits out of Mexico expecting a return on US. deposits. Of course, this cannot happen under a xed exchange rate regime (hard peg), which means Banco de Mexico intervenes by the interest rate which requires a monetary , ie. in money supply. The new short-run equilibrium is characterized by a higher and lower If the exchange rate regime was a oating regime, the expectational shock would have had a effect on output, by the trade balance