In response to a severe recession, a politician in a country with a fixed exchan

Question

In response to a severe recession, a politician in a country with a fixed exchange rate proposes that they should allow the exchange rate to float. This move will be a good one if the currency is:

A) overvalued so that allowing a float will depreciate the currency, increasing net exports and GDP

A) overvalued so that allowing a float will depreciate the currency, increasing net exports and GDP

B) undervalued so that allowing a float will depreciate the currency, increasing net exports and GDP. C) undervalued so that allowing a float will appreciate the currency, decreasing net exports and GDP. D) overvalued so that allowing a float will appreciate the currency, decreasing net exports and GDP.

Explanation / Answer

overvalued so that allowing a float will depreciate the currency, increasing net exports and GDP

the above is the answer

because under fixed rate it may be that the currency is overvalued so when it is floated its value will be as per demand and supply in market which will take it lower from overvalued so its would encourage net exports and GDP.

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