Exercises: The reference interest rate

1. a) Explain what Banco de México's main goal is and what its $3\%$ inflation target with a variation interval of $\pm 1$ percentage point means.
2. b) Why do you think it was granted autonomy from the federal government in 1994? Argue what could happen if the ruling government controlled money issuance.

Suppose Banxico announces that it is raising its reference rate from $10.50\%$ to $11.25\%$ per year.

1. a) Explain what problem Banxico usually tries to fight with a rate hike.
2. b) Describe how this decision affects a family planning to take out a car loan and a saver who keeps money in a bank note.

Monetary policy takes months to work because it acts through a chain of reactions.

1. a) Put in order and explain the transmission chain that a reference-rate hike follows until it slows inflation down, using these links: aggregate demand, consumer and investment credit, saving, prices.
2. b) Add a second channel: explain why a high interest rate in Mexico can attract foreign capital and make the peso appreciate against the dollar, and how that also helps hold down the prices of imported goods.