Question

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to _________,...

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to _________, and under flexible exchange rates expansionary fiscal policy causes income to __________.

increase; increase

increase; remain unchanged

remain unchanged; remain unchanged

remain unchanged; increase

none of the above
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Answer #1

The Answer is B.

Under fixed exchange rate, the central bank stands ready to buy or sell the domestic currency in exchange for foreign currency at a fixed price. Expansionary fiscal policies like higher government spending or lower taxes leads to a higher income .

Under flexible exchange rate, value of one currency in terms of another currency is determined using demand or supply mechanism. Under the flexible exchange rates, expansionary fiscal policies won't affect income.

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