Which of the following statements is true?
A)Monetary policy is a powerful economic tool for a country with fixed exchange rates and high capital mobility.
B)Under floating exchange rates, external capital-flow shocks can have effects on internal balance by altering the exchange rate and the country's international competitiveness.
C)Fiscal policy for a country with floating exchange rates is more powerful with a high degree of capital mobility than with a low degree of capital mobility.
D)An expansionary monetary policy tends to increase the exchange rate value of the domestic currency in the short run.

Question

Quizplus · Accepted Answer

Under floating exchange rates, external capital-flow shocks can have effects on internal balance by altering the exchange rate and the country's international competitiveness. A is incorrect because with fixed exchange rates, monetary policy is constrained by the need to maintain the exchange rate, limiting its effectiveness. C is incorrect because fiscal policy's effectiveness is limited by the mobility of capital, which can flow in or out of the country in response to changes in government spending or taxation. D is incorrect because an expansionary monetary policy tends to decrease the exchange rate value of the domestic currency in the short run as it increases the supply of money in the economy.

Which of the Following Statements Is True