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