A country with a recessionary gap and a fixed exchange rate will be helped most by a(n):

Question

Quizplus · Accepted Answer

A recessionary gap indicates that the country is producing below its potential, which means there is a surplus of goods and services in the economy. A devaluation of the currency will make exports cheaper and more attractive to foreign buyers, which can help boost demand for domestic goods and services and increase production in the economy. Expansionary monetary policy could also be effective, but if the exchange rate is fixed, the central bank may be limited in its ability to use this policy tool. A revaluation of the currency could actually worsen the recessionary gap by making exports more expensive and reducing demand for domestic goods and services. Therefore, the best option is a devaluation of the currency.

A Country with a Recessionary Gap and a Fixed Exchange