Using the IS-LM-BP model with the perfect capital mobility assumption to answer this question.Which of the following statements is TRUE?
I.In a floating exchange rate regime,fiscal policy is effective in stimulating income.
II.In a floating exchange rate regime,monetary policy is effective in stimulating income.
A) Only I is true.
B) Only II is true.
C) Both I and II are true
D) Neither I nor II is true.

Question

Quizplus · Accepted Answer

In the IS-LM-BP model with perfect capital mobility and a floating exchange rate regime, monetary policy is more effective than fiscal policy in stimulating income. This is because in a floating exchange rate regime, fiscal policy could lead to an increase in interest rates which would attract capital inflows, leading to an appreciation of the exchange rate and consequently, reducing net exports. On the other hand, monetary policy can influence income directly by affecting investment and consumption through interest rates without affecting exchange rates. Therefore, statement II is true and statement I is false.

Using the IS-LM-BP Model with the Perfect Capital Mobility Assumption