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

• Lets suppose U.S. inflation is 7% and Mexicos inflation is 10%. Further assume the U.S. dollar appreciates about 3% 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? Because the U.S. importer finds that buying the MXN CURRENCY at a _________% lower price but 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.