Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

question 51

Multiple Choice

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn) .Suppose fiscal policy makers increase taxes.This fiscal contraction will cause which of the following?

• A)the real exchange rate will be permanently higher in the medium run.
• B)the real exchange rate will be permanently lower in the medium run.
• C)the effects of this devaluation on the real exchange rate will be ambiguous in the medium run.
• D)the real exchange rate will be unchanged in the medium run.
• E)none of the above

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Definitions:

Monopolist

A single supplier in a market who has exclusive control over a particular good or service, potentially leading to higher prices and lower output.

Marginal Cost

The cost of producing one more unit of a good or service.

Marginal Cost

The increased cost resulting from the production of an extra unit of a good or service.

Fourth Unit

A reference to a specific item in a series, often used in economic theories or models to discuss marginal utility or cost of an additional unit.