In a fixed exchange rate regime,a reduction in the price level will cause which of the following?
A)a real appreciation and a leftward shift in the aggregate demand curve
B)a real appreciation and no shift in the aggregate demand curve
C)a real depreciation and a rightward shift in the aggregate demand curve
D)a real depreciation and no shift in the aggregate demand curve
E) no change in the real exchange rate, and no change in aggregate demand

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime, a reduction in the price level will lead to a real appreciation, as the domestic currency becomes more expensive relative to foreign currencies. However, there will be no shift in the aggregate demand curve, as the fixed exchange rate prevents any changes in the domestic price level from affecting the overall level of demand in the economy.

In a Fixed Exchange Rate Regime,a Reduction in the Price