In a fixed exchange rate regime, an increase in the price level will cause:
A) a real appreciation and no shift in the aggregate demand curve.
B) no change in the real exchange rate, and no change in aggregate demand.
C) a real depreciation and a rightward shift in the aggregate demand curve.
D) a real appreciation and a leftward shift in the aggregate demand curve.
E) a real depreciation and no shift in the aggregate demand curve.

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime, an increase in the domestic price level leads to a real appreciation because the nominal exchange rate is fixed, and the higher price level makes domestic goods more expensive relative to foreign goods. This does not shift the aggregate demand curve.

In a Fixed Exchange Rate Regime, an Increase in the Price