In an open economy with fixed exchange rates, an expansionary fiscal policy:
A) is very effective in changing equilibrium output.
B) is not effective in changing equilibrium output.
C) is effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) None of the above

Question

Quizplus · Accepted Answer

In an open economy with fixed exchange rates, an expansionary fiscal policy is effective in changing equilibrium output because it increases aggregate demand, leading to higher output and income levels. The fixed exchange rate regime prevents currency depreciation, which would otherwise offset the fiscal expansion.

In an Open Economy with Fixed Exchange Rates, an Expansionary