4x Choose all of the ways that exchange rates can affect purchasing power. A it would cause inflation B it would cause deflation C it diminishes domestic purchasing power D it would cause an increase in domestic : taxation businesses may pass the extra cost on to the consumers

## Step 1<br />The problem is asking us to identify the ways in which exchange rates can affect purchasing power. <br /><br />## Step 2<br />Option A suggests that exchange rates can cause inflation. This is true because if the domestic currency weakens, it means that more of the domestic currency is needed to purchase the same amount of foreign goods. This can lead to an increase in the price of goods, which is inflation.<br /><br />## Step 3<br />Option B suggests that exchange rates can cause deflation. This is also true because if the domestic currency strengthens, it means that less of the domestic currency is needed to purchase the same amount of foreign goods. This can lead to a decrease in the price of goods, which is deflation.<br /><br />## Step 4<br />Option C suggests that exchange rates can diminish domestic purchasing power. This is true because if the domestic currency weakens, it means that more of the domestic currency is needed to purchase the same amount of foreign goods. This can lead to a decrease in the purchasing power of the domestic currency.<br /><br />## Step 5<br />Option D suggests that exchange rates can cause an increase in domestic taxation. This is not directly related to exchange rates. Taxation is a policy decision made by the government and is not directly influenced by exchange rates.<br /><br />## Step 6<br />The last statement suggests that businesses may pass the extra cost on to the consumers. This is true because if the cost of imported goods increases due to a weak domestic currency, businesses may pass these increased costs onto consumers.