Domestic inflation of fixed or managed exchange Rate

Question:

A county with a fixed or managed exchange rate would consider i.___________________ its currency if the country is worried about domestic inflation. ii. Briefly Explain?

Answer:

The country will revalue its currency. This will increase the cost of its exports goods and lower the price of its imports. This will worsen the net exports and hence the aggregate demand in the economy will fall, leading to a fall in price levels and hence, inflation.

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