Under fixed exchange rate, the response of an economy to a temporary fall in foreign demand for its exports is
A) the currency appreciates, and output falls.
B) the currency depreciates, and output falls.
C) the currency remains the same, and output decreases.
D) the currency depreciates, and output remains constant.
E) the currency appreciates, and output remains the same.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, the value of the currency does not change in response to economic events such as a fall in foreign demand for exports. Instead, the central bank intervenes to keep the currency value constant. However, the decrease in foreign demand leads to a reduction in export revenue, which can cause output to decrease as the economy adjusts to the lower level of demand.

Under Fixed Exchange Rate, the Response of an Economy to a Temporary