Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

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.