(a) Using the closed-economy AS-AD model, explain the adjustment process by which an economy that is initially in a recession returns to the natural rate of unemployment in the medium term. (40 marks)

(b) Using the open-economy AS-AD model and considering the same scenario, explain the potential benefit of a currency devaluation in accelerating the return to the natural rate of unemployment. Compare the medium-term profiles of economies A and B, where economy A opts to devalue but economy B opts to maintain a fixed exchange rate. (30 marks)

(c) Explain the reasons why many countries choose to maintain a fixed exchange rate, despite the potential benefits from a flexible exchange rate regime. 30 marks)