If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.
What will be an ideal response?
Lacking any type of fixed exchange rate regime, a country that experiences high rates of inflation and also a high level of exports may actually welcome flexible exchange rates. The high level of domestic inflation, relative to other countries, will cause the country's currency to depreciate, however it is this depreciation that will keep the country's products competitive on world markets. Purchasing power parity and flexible exchange rates are ways that countries experiencing high rates of inflation can continually sell their goods on world markets. If the exchange rate between two countries was fixed and a country experienced high levels of domestic inflation, their products would become less competitive on world markets and export industries would suffer. This also points to the fact that flexible exchange rates in a country that relies heavily on imports can be devastating when the country experiences high rates of domestic inflation.
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