For this question, assume that policy makers are pursuing a fixed exchange rate regime and that output is initially less than the natural level of output. The economy will tend to move toward the natural level of output when which of the following occur?

A) an increase in the price level
B) a reduction in the foreign price level
C) an increase in the domestic interest rate
D)  a devaluation of the currency
E) none of the above

ANSWER:

D)  a devaluation of the currency