If inflation in the United States is relatively higher than inflation in Japan, and the Japanese government wants to keep the exchange rate fixed between the yen and the dollar, it should most likely ________.
A)allow its currency to rise against the dollar
B)allow its currency to fall against the dollar
C)increase the supply of yen in the market
D)decrease the supply of yen in the market

Question

Quizplus · Accepted Answer

To keep the exchange rate fixed despite higher inflation in the United States compared to Japan, the Japanese government would need to increase the supply of yen in the market. This action would devalue the yen relative to the dollar, offsetting the inflation differential and helping to maintain the fixed exchange rate.

If Inflation in the United States Is Relatively Higher Than