In the long run under fixed exchange rates, wage and price flexibility leads to flexibility in the real exchange rate and helps to restore internal and external balance.

Question

Quizplus · Accepted Answer

Under fixed exchange rates, wage and price flexibility can adjust the real exchange rate by changing the domestic price level, thereby helping to restore internal balance (equilibrium in domestic output and employment) and external balance (equilibrium in the balance of payments).

In the Long Run Under Fixed Exchange Rates, Wage and Price