Which one of the following statements is the most accurate?
A) Fiscal policy has the same effect on employment under fixed and flexible exchange rate regimes.
B) Fiscal policy affects employment less under fixed than under flexible exchange rate regimes.
C) Fiscal policy affects employment more under fixed than under flexible exchange rate regimes.
D) Fiscal policy cannot affect employment under fixed exchange rate but does affect output under flexible exchange rate regimes.
E) Fiscal policy can affect employment under fixed exchange rate regimes, but does not affect output under flexible exchange rate regimes.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, fiscal policy can have a more pronounced effect on employment because the central bank must adjust monetary policy to maintain the fixed exchange rate, potentially amplifying the fiscal policy's impact. In contrast, under a flexible exchange rate regime, exchange rate adjustments can offset some of the fiscal policy's effects.

Which One of the Following Statements Is the Most Accurate