In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

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In a freely floating exchange rate system, the value of the currency is determined by supply and demand in the foreign exchange market. If the U.S. experiences higher inflation, the value of the dollar will decrease relative to other currencies, causing foreign imports to become more expensive. This can lead to reduced competition from foreign producers, as their goods will be more expensive compared to domestic goods. Therefore, a high U.S. inflation rate can be magnified in a freely floating exchange rate system.

In a Freely Floating Exchange Rate System, High U