In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.
A) appreciate; increase
B) appreciate; decrease
C) depreciate; increase
D) depreciate; decrease

Question

Quizplus · Accepted Answer

According to the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then the exchange rate will depreciate to stimulate net exports and increase aggregate demand. This will result in an increase in output and employment in the short run. However, in the long run, the price level will fall to restore the economy to its natural rate. Therefore, the correct choice is C: depreciate; increase net exports.

In the Mundell-Fleming Model, If the Economy Is Operating at or Below