Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

question 60

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 an increase in wealth causes households to increase consumption.This wealth-induced increase in consumption will cause which of the following to occur?

• 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.

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Definitions:

Economic Decisions

Economic decisions involve choices about resource allocation, production, distribution, and consumption within an economy, often under conditions of scarcity.

Strong Influence

The significant impact or control one party may have over the actions, decisions, or opinions of another.

Consumer Behavior

The study of how individuals or groups select, purchase, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and desires.

Clear Preferences

The concept in decision theory and economics where consumers or decision-makers have well-defined preferences, allowing for consistent choices among sets of alternatives.