Reference no: EM13896659

Over the next twenty years, the average overall rate of inflation in Mexico is expected to be 8% per year, while in the United States the overall rate of inflation is expected to average 2% percent per year. Because of continued foreign direct investment in Mexico, productivity gains in Mexican manufacturing are expected to hold the inflation rate in sectors that produce tradable goods to 4%, with the rest of the economy averaging 12% inflation. In the United States, inflation is expected to be more uniform throughout the economy. These figures are summarized in the table below. Inflation in Inflation in Average Prices of Prices of Overall Traded Goods Nontraded Goods Inflation Mexico 4% 12% 8% United States 2% 2% 2% a. Based on the information above, we can expect that over the next twenty years, the average annual percentage change in the peso per dollar exchange rate will be ______. b. Real exchange rates are used to identify the portion of a change in a nominal exchange rate that cannot be accounted for by a difference in the countries’ overall rates of inflation. Suppose that the real exchange rate in this problem is measured as the price of all U.S. goods (traded and nontraded) relative to, or divided by, the price of all Mexican goods (traded and nontraded). Then what would you expect the average annual percentage change in the real exchange rate to be? ______.