Assume that the expectation of a recession next year causes business investments and household consumption to fall, as well as the financing to support it. If the nation has low mobility international capital markets and a fixed exchange rate system, what happens to the real exchange rate and the monetary base in the context of the Three-Sector-Model? Assume the nominal exchange rate is stated
as: (foreign currency per domestic currency).
a. The real exchange rate rises and monetary base rises.
b. The real exchange rate falls and monetary base falls.
c. The real exchange rate rises and monetary base falls.
d. The real exchange rate and monetary base remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
.A
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