With flexible exchange rates, fiscal policy is not very effective in changing exchange rates and interest rates.

Question

Quizplus · Accepted Answer

With flexible exchange rates, fiscal policy can be quite effective in influencing exchange rates and interest rates. When a government increases spending (expansionary fiscal policy), it can lead to higher interest rates, attracting foreign capital and causing the domestic currency to appreciate. Conversely, contractionary fiscal policy can lead to lower interest rates and a depreciation of the domestic currency.

With Flexible Exchange Rates, Fiscal Policy Is Not Very Effective