Under a fixed-rate system,a country that followed policies that would lead to a higher rate of inflation than that experienced by its trading partners would
A)experience a balance-of-payments surplus as its goods became more expensive
B)see an decrease in the supply of its currency on the foreign exchange markets
C)find its currency subject to upward pressure
D)experience a balance-of-payments deficit as its goods became more expensive

Question

Quizplus · Accepted Answer

Under a fixed-rate system, a country that experiences higher inflation than its trading partners would see an increase in the prices of its goods, making them comparatively more expensive. This would lead to a decrease in demand for its goods and an increase in demand for the goods of its trading partners. As a result, the country would experience a balance-of-payments deficit as its imports would increase and exports decrease.

Under a Fixed-Rate System,a Country That Followed Policies That Would