Suppose output is above the natural level of output. In a fixed ...

[serike]

Suppose output is above the natural level of output. In a fixed exchange rate regime, explain the two ways the economy can return to the natural level of output.
 
  What will be an ideal response?

Question 2

In the model where it is assumed that the state of technology does not change, what parameters and/or variables cause changes in steady state output per worker?
 
  A) savings rate
  B) depreciation rate
  C) human capital per worker
  D) all of above
  E) none of above

[mcomstock09]

Answer to Question 1

Revaluation. Policy makers could revalue the currency. This would cause a reduction in NX, and reduction in demand, and a reduction in Y. Graphically, the AD curve would shift to the left. Economy self-corrects. With Y above the natural level, the expected price level (or expected inflation) will rise causing W to rise. As W rises, P will rise. As P rises, a real appreciation occurs and NX falls. We would move along the AD curve.

Answer to Question 2

D

[serike]

Thanks for the timely response, appreciate it

[kjohnson]

Excellent