Assume that policy makers are pursuing a fixed exchange rate regime and that output is initially less than the natural level of output. The economy will tend to move toward the natural level of output when which of the following occur?
A) A revaluation of the currency.
B) A devaluation of the currency.
C) An increase in the price level.
D) An increase in the domestic interest rate.
E) A decrease in the foreign price level.

Question

Quizplus · Accepted Answer

A devaluation of the currency under a fixed exchange rate regime can help an economy move toward its natural level of output by making domestic goods cheaper relative to foreign goods. This can increase exports and decrease imports, thus stimulating domestic production and moving output closer to the natural level.

Assume That Policy Makers Are Pursuing a Fixed Exchange Rate