1. increase exports relative to imports.
2. reduce the net capital inflow.
3. increase domestic consumption.
4. do all of the above.
Choose the option above that is correct.
The correct option is 4. The rise in the fixed price of foreign currency in terms of domestic currency represents a devaluation of the domestic currency by making the foreign price of domestic currency lower. This makes domestic goods relatively cheaper than foreign goods to world (including domestic) residents, causing exports to increase and imports to fall. The current account deficit (which equals the net capital inflow) thus declines. The increase in desired net exports represents an increase in desired spending which causes employment, output and income to rise. This rise in income is likely to lead to an endogenous increase in consumption.