Answer to Question 3:

A decline in the domestic real exchange rate under less-than-full employment conditions resulting from a change in the level at which the government chooses to fix the nominal exchange rate will cause an upward shift of the EE curve.

True or False?

True! The devaluation shifts world demand onto domestic goods from foreign goods. This will increase output and employment. Graphically, the EE curve will shift up so that it will cross the 45 degree line at a higher level of output output.

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