Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that households decide to decrease consumption because of falling consumer confidence. Given this information, we would expect which of the following to occur?
A) A decrease in the domestic interest rate.
B) An increase in investment.
C) An increase in the exchange rate.
D) A decrease in investment.
E) A decrease in the exchange rate.

Question

Quizplus · Accepted Answer

A decrease in consumption leads to lower aggregate demand, which can reduce business revenues and profits, leading to a decrease in investment.

Assume That Policy Makers Are Pursuing a Fixed Exchange Rate