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When the Federal Reserve raises rates, dollar-denominated assets become more attractive. For a country pegged to the dollar, maintaining the peg typically requires aligning monetary policy or using reserves to defend the peg. If the pegged country’s domestic rates do not rise in tandem, investors may shift into dollar assets for better returns, producing capital outflows (A). Option B is incorrect because maintaining the peg means the nominal exchange rate does not depreciate; instead, pressure mounts on foreign reserves or domestic rates. Option C confuses channels: higher U.S. rates can transmit tighter financial conditions globally, but inflation dynamics depend on domestic policy credibility, pass-through, and expectations. Option D reverses the logic: with a fixed peg, the currency does not weaken against the dollar; exports might even face headwinds if the dollar strengthens against third currencies, making the pegged country less competitive in non-dollar markets. FSOT assesses familiarity with open-economy macro and policy trade-offs relevant to U.S. economic diplomacy.