For this question,assume that policy makers are pursuing a fixed exchange rate regime and that output is initially greater 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)an increase in the price level
B)a devaluation of the currency
C)a reduction in the domestic interest rate
D)an increase in the foreign price level
E) none of the above

Question

Quizplus · Accepted Answer

An increase in the price level will reduce real money balances, leading to higher interest rates, reduced investment, and lower output, moving the economy back toward the natural level of output.

For This Question,assume That Policy Makers Are Pursuing a Fixed