Under perfect capital mobility and fixed exchange rates, expansionary _____ is especially effective because the _____.
A)fiscal policy; LM curve effectively is vertical.
B)monetary policy; LM curve effectively is the same as the FE curve.
C)fiscal policy; interest rate does not change.
D)monetary policy; interest rate does not change.

Question

Quizplus · Accepted Answer

Under perfect capital mobility and fixed exchange rates, expansionary fiscal policy is especially effective because the interest rate does not change. This is because any potential upward pressure on interest rates from fiscal expansion is offset by capital inflows, which are attracted by the fixed exchange rate, thus keeping the interest rate stable.

Under Perfect Capital Mobility and Fixed Exchange Rates, Expansionary _____