A-LevelEconomicsThe macroeconomy9708/12 · Oct/Nov 2014 · Q301 Mark
To reduce a deficit on the current account of the balance of payments, a government introduces a limit on the foreign exchange its people and firms can purchase. Why may this increase the country's inflation rate?
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.
✓ Correct answer
A: Firms may have to purchase more expensive, domestically-produced raw materials.
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