In an open economy with a fixed exchange rate, adjustment to a shock is achieved through temporary booms and slumps that temporarily affect inflation, with induced effects on the real exchange rate, the balance of payments, and changes in external wealth.

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In an open economy with a fixed exchange rate, adjustments to economic shocks are indeed managed through temporary economic fluctuations (booms and slumps) that affect inflation rates. These fluctuations indirectly influence the real exchange rate and the balance of payments, as well as changes in external wealth, as the fixed nominal exchange rate prevents direct adjustment through currency valuation changes.

In an Open Economy with a Fixed Exchange Rate, Adjustment