I5

Suppose that in 2015, the rate of inflation in the United States was 2% and the rate of inflation in Mexico was 8%.

(a) Which country had a higher nominal interest rate in 2015? Why? Explain your answer.

Now suppose you are told that the real appreciation of the US Dollar (USD) relative to the Mexican Peso (MXN) was 7% in 2015.

(b) Based on this fact, which country had a higher real interest rate in 2015?

(c) During 2015, did the USD appreciate or depreciate in nominal terms relative to MXN? By how much? Explain your answer.