Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

question 8

Multiple Choice

Assume that policy makers are pursuing a fixed exchange rate regime and the economy is initially operating at the natural level of output. Which of the following will occur as a result of a revaluation?

• A) The real exchange rate will be permanently lower in the medium run.
• B) The real exchange rate will be unchanged in the medium run.
• C) The nominal exchange rate will initially fall in the short run and then increase in the medium run.
• D) The effects of this revaluation on the real exchange rate will be ambiguous in the medium run.
• E) The real exchange rate will be permanently higher in the medium run.