In the late 1970s, several countries in Latin America, notably Mexico, Brazil, and Argentina, had accumulated large external debt burdens. A significant share of this debt was denominated in U.S. dollars. The United States pursued contractionary monetary policy from 1979 to 1982, raising dollar interest rates. a.How would this affect the value of the Latin American currencies relative to the U.S. dollar?b. How would this affect their external debt in local currency terms?c. If these countries had wanted to prevent a change in their external debt, what would have been the appropriate policy response, and what would be the drawbacks?

Monetary policy refers to the actions and measures implemented by a central bank or monetary…

Answered: In the late 1970s, several countries in…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 10CQ

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In the late 1970s, several countries in Latin America, notably Mexico, Brazil, and Argentina, had accumulated large external debt burdens. A significant share of this debt was denominated in U.S. dollars. The United States pursued contractionary monetary policy from 1979 to 1982, raising dollar interest rates.

a.How would this affect the value of the Latin American currencies relative to the U.S. dollar?

b. How would this affect their external debt in local currency terms?

c. If these countries had wanted to prevent a change in their external debt, what would have been the appropriate policy response, and what would be the drawbacks?

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