Under a fixed-rate system, a country that followed policies that would lead to a higher rate of inflation than that experienced by its trading partners would
A) experience a balance?of?payments surplus as its goods became more expensive
B) see a decrease in the supply of its currency on the foreign exchange markets
C) find its currency subject to upward pressure
D) experience a balance?of?payments deficit as its goods became more expensive

Question

Quizplus · Accepted Answer

If a country experiences higher inflation than its trading partners, its goods become more expensive in comparison, leading to a decrease in demand for its products and a higher demand for imports. This would result in a balance-of-payments deficit as it has to pay more for imports, leading to an outflow of currency.

Under a Fixed-Rate System, a Country That Followed Policies That