Suppose country A pegs its nominal exchange rate to country B, and that country A has a higher inflation rate than country B. In this situation, country A will experience:

Question

Quizplus · Accepted Answer

When country A has a higher inflation rate than country B while pegging its nominal exchange rate to country B, it effectively makes its goods more expensive relative to country B's goods. This leads to a worsening trade position as its exports become less competitive and imports from country B become cheaper. The real exchange rate, which adjusts the nominal rate for inflation differences, increases, making country A's goods relatively more expensive internationally. This can also lead to a decrease in domestic demand for locally produced goods as imports become more attractive, affecting all the mentioned aspects.

Suppose Country a Pegs Its Nominal Exchange Rate to Country