Under a fixed exchange rate system,an expansionary fiscal policy is
A) more effective in an open economy than in a closed economy.
B) less effective in an open economy than in a closed economy.
C) equally effective in an open economy and in a closed economy.
D) marginally effective in an open economy and completely ineffective in a closed economy.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, an expansionary fiscal policy is more effective in an open economy because it can lead to increased demand for domestic currency, which the central bank must accommodate by increasing the money supply to maintain the fixed exchange rate, thus amplifying the fiscal policy's impact.

Under a Fixed Exchange Rate System,an Expansionary Fiscal Policy Is