APFIVE Fixed Exchange Rates and Inflation
A country maintains a fixed exchange rate but experiences persistent inflation higher than its trading partners. What will eventually force an adjustment in the foreign exchange market?
A
Natural increase in exports due to the fixed exchange rate advantage
B
Increased foreign investment attracted by higher nominal returns
C
Automatic appreciation of the currency due to purchasing power parity
D
Depletion of foreign exchange reserves as the central bank defends the peg
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