What will happen in the medium run to a country under the fixed exchange rate when it is running a trade deficit with output below potential? a. The change in the real exchange rate will cause a deterioration in trade balance, although it increases output over time. b. As inflation is below target, domestic price will grow relatively slowly, leading to an increase in the real exchange rate. c. The decrease in the real exchange rate will increase net exports and return output to potential over time. d. The nominal exchange rate will decrease, which causes a decrease in the real exchange rate.
What will happen in the medium run to a country under the fixed exchange rate when it is running a trade deficit with output below potential? a. The change in the real exchange rate will cause a deterioration in trade balance, although it increases output over time. b. As inflation is below target, domestic price will grow relatively slowly, leading to an increase in the real exchange rate. c. The decrease in the real exchange rate will increase net exports and return output to potential over time. d. The nominal exchange rate will decrease, which causes a decrease in the real exchange rate.
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter14: A Macroeconomic Theory Of The Open Economy
Section: Chapter Questions
Problem 6PA
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Transcribed Image Text:What will happen in the medium run to a
country under the fixed exchange rate
when it is running a trade deficit with
output below potential?
a. The change in the real exchange rate will
cause a deterioration in trade balance,
although it increases output over time.
b. As inflation is below target, domestic
price will grow relatively slowly, leading to
an increase in the real exchange rate.
c. The decrease in the real exchange rate
will increase net exports and return output
to potential over time.
d. The nominal exchange rate will decrease,
which causes a decrease in the real
exchange rate.
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