In a system of adjustable pegged exchange rates, what is the likely effect if inflation in the United States is higher than that of its trading partners?

Show Answers

Exports from the U.S. generally increase while imports decreaseImports into the U.S. generally increase while exports decreaseU.S. foreign currency reserves are likely to growThere is no significant change in U.S. foreign currency reservesThe U.S. dollar strengthens relative to other currencies

Explanation

When inflation in the U.S. surpasses that of its trading partners under an adjustable pegged exchange rate regime, U.S. goods become relatively more expensive. This typically causes U.S. imports to rise and exports to decline, as foreign products become more competitively priced compared to domestic goods.