Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

Multiple Choice

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

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