Under a fixed exchange rate regime,what would be the result if a country rapidly increased its money supply by printing currency?
A) It would lead to increase in the worth of the currency.
B) The prices of imports would become more attractive in the country.
C) The country's goods would be highly competitive in world markets.
D) Trade surplus in the country would increase.
E) It would lead to price deflation in the country.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, the value of a country's currency is fixed relative to another currency or a fixed value of gold. If the country rapidly increases its money supply by printing currency, it would lead to inflationary pressures, which would make the prices of goods in the country relatively more expensive. However, the prices of imports would become more attractive because the value of the country's currency would remain the same. This would result in an increase in the demand for imports, and a decrease in the demand for the country's exports, which would lead to a trade deficit.

Under a Fixed Exchange Rate Regime,what Would Be the Result