Question

What will happen if a country increases its money supply rapidly under fixed exchange rate regime? question 34 options: 1) the country will face negative inflation. 2) imports will become less attractive in that country. 3) the country's products will become more attractive in world markets. 4) trade deficit would widen in that country?

Answer 1

The answer is "trade deficit would widen in that country".

A fixed exchange rate regime forces financial discipline on nations and abridges price inflation. For instance, if a nation expands its cash supply by printing more money, the expansion in cash supply would prompt price inflation. Given fixed exchange rates, inflation would make the nation's merchandise noncompetitive in world markets, while the costs of imports would turn out to be more appealing in that nation. The outcome would be an augmenting exchange shortage in the nation, with the nation bringing in more than it sends out.