Currency Crisis Question Answer 2022

Running head: QUESTION
Question
Name of the Student:
Name of the University:
Author Note:

QUESTION1
Table of Contents
Answer to Question 1:................................................................................................................2
Part a:.....................................................................................................................................2
Part b:.....................................................................................................................................2
Part c:.....................................................................................................................................4
Part d:.....................................................................................................................................5
Answer to Question 2:................................................................................................................6
Part a:.....................................................................................................................................6
Part b:.....................................................................................................................................7
Part c:.....................................................................................................................................8
References:...............................................................................................................................10

QUESTION2
Answer to Question 1:
Part a:
The economic indicators during the Mexican crisis showed a series of trend which is
highlighted in the following points,
 The exchange rate of the country was first fixed to the USD to improve credibility and
investor confidence. This was helpful however it led to the significant uncontrolled
appreciation of the currency. This was later pegged to reduce the overvaluation of the
currency which seemed to be a failure which was followed by making the currency
free float leading to the crisis. The currency was significantly appreciated which
depreciated when the uncertainty in the economy increased leading to the crisis
(Monras 2018).
 The foreign reserves declined significantly for the country as the capital inflows of the
country reduced. To maintain the peg on the currency and to check on inflation the
reserves were being used to maintain the trade deficit. The fall in the reserve was
significant as the $33.3 billion reserve fell to $10 billion in a matter of two years. This
was also followed by the further fall in the reserve when the currency was made free
float leading to a fall in reserve by $5 billion (Khan 2018).
 The balance of payments deficit for the country increased significantly as the imports
were increased due to appreciation of the currency. This was also followed by the
reduction in the capital flows to maintain the deficit which led to the deficit to
increase substantially leading to the fall in the foreign currency reserves (Hall 2018).

QUESTION3
Part b:
The country of Mexico was suffering from high level of inflations before the currency
crisis of 1994. The country planned on lowering the inflation in the country by fixing it to the
dollar which was followed by pegging of the currency. Thus, ultimately making the currency
free float led to the start of the crisis (Wilken 2017).
However, various factors were affecting the country before the currency crisis
affected the country. The fixing of currency to the US dollar led to the appreciation of the
Mexican Peso. Thus it made the export business of the country non-competitive to the global
markets, however the imports for the country became cheap. Thus the change in the currency
pegs led to the reduction of inflation in the country which was also followed by increase in
the imports for the country. Also this led to the increase in the portfolio investment of the
country. This led to further increase in the capital inflows of the country. The USD 3.5 billion
amount in 1989 increased to USD 33.3 billion in just 5 years (Reyes, Castro and Landazábal
2020).
The situation before the currency crisis in the country was that it was having a huge
trade deficit or current account deficit of $48 billion while the inflow of private capital was
$57 billion. The portfolio investment in the country before the fixing of the currency was
theoretically non-existent but became around $28.4 billion in 1993. The reason for the
balance of payment difficulties for the country can be summarized in the following points,
 The fixing of the Mexican Peso with the US Dollar earned significant credibility in
the international markets.
 This led to the appreciation of the currency making imports cheaper while exports
became relatively uncompetitive. The imports increased significantly leading to the
deficit of trade being created for the country.