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Competitiveness with a Fixed Currency Price
Imagine two countries, Country A (the home country) and Country B (the foreign country), have an agreement to keep the price of Country B's currency in terms of Country A's currency constant over time. Over a five-year period, the average annual increase in the prices of goods and services in Country A is 5%, while in Country B it is only 1%. Explain what will happen to the relative cost of goods from Country B for consumers in Country A and, consequently, how the international competitiveness of Country A's products will change. Justify your reasoning.
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