Under a fixed exchange-rate system and high capital mobility, other things equal an expansion in the domestic money supply leads to a
A) trade deficit and capital inflow.
B) trade deficit and capital outflow.
C) trade surplus and capital inflow.
D) trade surplus and capital outflow.

Question

Quizplus · Accepted Answer

Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply would lead to a depreciation in the exchange rate. This would make imports relatively more expensive and exports relatively cheaper, leading to a trade deficit. Additionally, capital outflow would occur as investors seek higher returns in foreign markets due to the lower exchange rate. Therefore, the correct choice is B - a trade deficit and capital outflow.

Under a Fixed Exchange-Rate System and High Capital Mobility, Other