According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:
A) exchange rate.
B) price level.
C) level of government spending.
D) tax rates.

Question

Quizplus · Accepted Answer

According to the Mundell-Fleming model, if the Federal Reserve cannot alter domestic interest rates, the only channel through which changes in the money supply can affect the economy is the exchange rate. An increase in the money supply will lead to a depreciation of the currency, making exports cheaper and imports more expensive, which in turn will stimulate net exports and aggregate demand. Conversely, a decrease in the money supply will appreciate the currency, making exports more expensive and imports cheaper, which will reduce net exports and aggregate demand.

According to the Mundell-Fleming Model for a Small Open Economy