To reduce a deficit on the current account of the balance of payments, a government imposes a limit on the foreign exchange its people and firms can purchase.
Why may this increase the country’s inflation rate?
Firms may have to purchase more expensive, domestically-produced raw materials.
2 )
Firms may have to sell more of their output on the domestic market.
3 )
The change in demand for foreign currency on the foreign exchange market may lead to an appreciation in the exchange rate.
4 )
The change in supply of the domestic currency on the foreign exchange market may reduce the money supply in the domestic economy.
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