Suppose the Country That Pegs Its Currency Has an Overvalued

question 12

Multiple Choice

Suppose the country that pegs its currency has an overvalued real exchange rate and that output is currently above the natural level of output. Which of the following will occur as the economy adjusts to this situation?

• A) The interest rate falls as the economy adjusts by itself.
• B) Net exports will increase as the economy adjusts to this situation.
• C) Domestic goods will become less competitive as the economy adjusts by itself.
• D) Prices will decrease over time until Y = Yn.
• E) A decrease in the pegged value of the domestic currency will cause a leftward shift of the AD curve.

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Definitions:

Interest Rates

The percentage of a sum of money charged for its use, indicating the cost of borrowing money or the return on invested savings.

Inflation Rates

The pace at which overall prices for goods and services climb, diminishing the value of money.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Interest Rate

The percentage charged by a lender to a borrower for the use of assets, reflecting the cost of borrowing money.