Assume that you live in the United States and invest $60,000 to establish a lang
ID: 430271 • Letter: A
Question
Assume that you live in the United States and invest $60,000 to establish a language school called Escuela de Inglés in Mexico City, Mexico. You set up a small subsidiary in Mexico, with an office and an attached classroom that you lease. You hire local individuals in Mexico who can speak English and teach it to others. Your school offers two types of courses: a 1-month structured course in English and a 1-week intensive course for individuals who already know English but want to improve their skills before visiting the United States. You advertise both types of teaching services in local newspapers.
All revenue and expenses associated with your business are denominated in Mexican pesos. Your subsidiary sends most of the profits from the business in Mexico to you at the end of each month. Although your expenses are somewhat stable, your revenue varies with the number of clients who sign up for the courses in Mexico.
Explain how your business will likely be affected (at least in the short run) if the central bank of Mexico intervenes in the foreign exchange market by exchanging Mexican pesos for dollars.
Explanation / Answer
This form of direct intervention places downward pressure on the peso, which would adversely affect your business.
If the central bank of Mexico intervenes the foreign exchange by exchanging Mexican pesos for dollars then it would definitely be more effective in terms of imposing downward pressure on the currency. As the Peso would be forced downwardly, availability of the factors in exchange would reduce the overall effectiveness of the business as well as the business would be adversely affected. This exchange would reduce the overall exchange rate and also create an impact on the overall availability of different factors which would improve the efficiency of the organisation and result in a negative way for the business.