Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

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.