Chapter Twenty: Intro -- Exchange Rate Regimes and Crises

In December of 1994 Mexico suddenly devalued its currency from roughly 3 pesos to the dollar to more than 6 pesos to the dollar. Why did this happen? Why was Mexico's currency overvalued to begin with? Why is it that the U.S. economy never experiences such sudden currency devaluations?

Between 1991 and 2001 Argentina fixed its currency to the U.S. dollar. What benefits did that country derive from this exchange rate arrangement? Why was the country forced to devalue and why did the decision lead to riots in the streets of Buenos Aires?

Suppose that U.S. policy makers wish to simultaneously boost output and weaken the domestic currency. Is fiscal policy or monetary policy more appropriate?

These are some of the questions that we address in this chapter. We recommend that you read the lecture notes first, then take the online quiz and read the summary to reinforce your knowledge.

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