A country that imports a significant proportion of its consumer goods can avoid inflation by adopting a fixed exchange rate because it can avoid the price increases of ________ that occur when the value of the domestic currency ________.
A)imports; rises
B)imports; falls
C)exports; rises
D)exports; falls

Question

Quizplus · Accepted Answer

When a country imports a significant portion of its consumer goods, its inflation rate is affected by the prices of imported goods. When the value of the domestic currency falls, the prices of imported goods rise, leading to higher inflation. By adopting a fixed exchange rate, the country can avoid this problem as the exchange rate will remain constant, and prices of imported goods will not fluctuate with currency changes. Thus, the best choice is B, imports; falls.

A Country That Imports a Significant Proportion of Its Consumer