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 an 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

A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation. If a country had to rapidly increase its money supply by printing currency, inflation would make its goods uncompetitive in world markets, while the prices of imports would become more attractive in that country. For example, given fixed exchange rates, inflation would make British goods uncompetitive in world markets, while the prices of imports would become more attractive in Great Britain. The result would be a widening trade deficit in Great Britain, with the country importing more than it exports.

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