Final answer:
Country A's higher inflation rates relative to country B under a fixed exchange rate policy will likely lead to a trade deficit, decreased reserve assets, and increased external indebtedness, but not worsening inflation, since the fixed exchange rate tends to contain inflation.
Step-by-step explanation:
Country A, which follows a fixed exchange rate policy pegged to the currency of country B, will likely face a set of economic challenges due to its higher inflation rates relative to country B. The higher inflation rate in country A leads to higher prices for its goods and services, making them less competitive internationally. As a result, it can be anticipated that country A may experience a growing deficit in international trade balance due to decreased export competitiveness and increased imports, which are relatively cheaper.
In this scenario, country A's commitment to a fixed exchange rate means it cannot devalue its currency to make exports more competitive. This could lead to a decrease in reserve assets as the country may have to use its reserves to maintain the fixed exchange rate. Additionally, a continued trade deficit could lead to growing external indebtedness as the country borrows to finance its trade deficits.
However, the issue that is not anticipated for country A under these circumstances is worsening inflation. This is because a fixed exchange rate regime, especially when the currency is pegged to a country with lower inflation, typically acts to contain inflationary pressures within the pegged economy. Therefore, the correct answer is option (c) Worsening inflation.