When the exchange rate is allowed to float freely in response to
market forces
1. the IS curve adjusts through changes
in Π to bring about goods market equilibrium.
2. the LM curve and ZZ line alone determine
the level of output at which the market for the domestic output
flow will be in equilibrium.
3. the real exchange rate will increase in
response to an increase in the demand for money when there is price
rigidity and less-than-full employment.
4. all of the above are true.
Choose the option above that is correct.