Suppose the country that pegs its currency has an overvalued real exchange rate

Question

Suppose the country that pegs its currency has an overvalued real exchange rate and that output is currently above the natural level of output. Which of the following will occur as the economy adjusts to this situation?15

a. The interest rate falls as the economy adjusts by itself.

b. Net exports will increase as the economy adjusts to this situation.

c. Domestic goods will become less competitive as the economy adjusts by itself.

d. Prices will decrease over time until Y = Yn.

e. A decrease in the pegged value of the domestic currency will cause a leftward shift of the AD curve.

Can anyone help me explain that thanks!

Explanation / Answer

c. Domestic goods will become less competitive as the economy adjusts by itself.

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