In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility,expansionary fiscal policy does all of the following EXCEPT:
A)increase interest rates.
B)increase income.
C)increase the IS curve.
D)increase inflation.

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility, an expansionary fiscal policy leads to an increase in income which shifts the IS curve to the right. This raises the demand for money, which puts upward pressure on interest rates. Therefore, option A is incorrect. An increase in income may also lead to an increase in imports, thereby putting downward pressure on the exchange rate and potentially increasing inflation. So, option D is also correct. Therefore, the correct answer is A and D.

In the Mundell-Fleming Model with a Floating Exchange Rate and Perfect