1. Fill in the blanks. Take your time. Think about it.

• Lets suppose U.S. inflation is 3% and Mexicos inflation is 8%. Further assume the U.S. dollar appreciates about 5% relative to the MXN (meaning the MXN depreciates approximately _______%).

• The U.S. is not necessarily going import less from Mexico just because Mexicos inflation is higher than the U.S.s. Why? The U.S. importer finds that buying MXN CURRENCY at a _________% lower price and THEN paying __________% higher prices for Mexican goods (due to inflation) than they did a year ago results in, effectively, a COMBINED ________ % increase in the dollar cost of buying Mexican goods.

• Thats the same price increase the U.S. buyer sees at home! Importing from Mexico is no less attractive (but no more either) than it used to be.