To cut a deficit in the current account of the balance of payments, a government sets a cap on the foreign exchange that its households and firms are allowed to buy. Why might this cause the country’s inflation rate to rise?
- AFirms may have to purchase more expensive, domestically-produced raw materials.
- BFirms may have to sell more of their output on the domestic market.
- CThe change in demand for foreign currency on the foreign exchange market may lead to an appreciation in the exchange rate.
- DThe change in supply of the domestic currency on the foreign exchange market may reduce the money supply in the domestic economy.