Question

Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?

Short answer

The supply of the Argentine pesos drops as the cost reduction. And there is an appreciation of the peso in the foreign currency markets.

Step-by-step solution

Concept introduction

Cost reduction means the method utilized by organizations to decrease their prices and improve their profits.

Demand for Argentine pesos 

A significant reduction in Argentina's inflation rate would raise the need for Argentine pesos because the cost is lower as the inflation is low. But the supply of the Argentine pesos declines with the cost reduction and we know that the amount provided and the cost are completely connected. And there is an appreciation of the peso in the foreign currency markets.