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

Question

Quizplus · Accepted Answer

Fiscal policy tends to have a stronger effect on output under fixed exchange rate regimes because changes in interest rates resulting from fiscal policy are not counteracted by exchange rate adjustments. In contrast, under flexible exchange rate regimes, changes in interest rates resulting from fiscal policy can lead to appreciation or depreciation of the currency, which moderates the effect of fiscal policy on output. Therefore, statement B is the most accurate.

Which One of the Following Statements Is the Most Accurate