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Assume that a country called Autaria has a fixed exchange rate regime. Assume further that Autaria's current macroeconomic condition is characterized by point 2 in
Assume that a country called Autaria has a fixed exchange rate regime. Assume further that Autaria's current macroeconomic condition is characterized by point 2 in the figure below where the country is in a recession (aggregate output is below output at full employment) and Autaria has a large current account deficit that is below the target level. What is the best policy response that can enable Autaria to achieve output at the full employment level and have the current account at the target level (point 1)? Exchange rate, E XX II Domestic spending, AOA. An expansionary fiscal policy keeping the value of the domestic currency (in terms of foreign currency) the same as before OB. An expansionary fiscal policy together with devaluation of the domestic currency (in terms of foreign currency) OC. A contractionary fiscal policy together with devaluation of the domestic currency (in terms of foreign currency) OD. An expansionary fiscal policy together with revaluation of the domestic currency (in terms of foreign currency) O E. A contractionary fiscal policy together with revaluation of the domestic currency (in terms of foreign currency)
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