Answer to Question #63543 in Macroeconomics for Henna

Question

Assume perfect capital mobility, fixed nominal exchange rate regime and rational expectations. How does an unexpected, one-time devaluation of the nominal exchange rate affect the economy?

Select one or more:
a. It does not increase output in the long run and is does not change the price level.
b. Output increases in the short and in the long run.
c. It does not affect the AD curve.
d. It moves the AD curve to the right.

Answer 1

An unexpected, one-time devaluation of the nominal exchange rate affects the economy in such direction:
It moves the AD curve to the right, so the price level and output increase.
So, the correct answer is:
d. It moves the AD curve to the right.