Suppose a country with a fixed exchange rate decides to implement a devaluation of its currency and ...........

Economics- Phase (I & II) IS-LM

Suppose a country with a fixed exchange rate decides to implement a devaluation of its currency and commits to maintaining the new fixed parity. This implies (A) ______________ in the demand for its goods and a monetary (B) _______________.

(A) contraction ; (B) contraction

(A) contraction ; (B) expansion

(A) expansion ; (B) contraction

(A) expansion ; (B) expansion

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Explanation:

the devaluation makes the country's goods more competitive as the real exchange rate falls, the IS curve shifts right. To maintain interest rates (stay on the IFM line), a monetary expansion would be required.