Which of the following is NOT likely to cause a money demand shock under a fixed exchange rate system?
A) a decline in foreign interest rates
B) a sudden decline in domestic output
C) a sudden increase in domestic output
D) a change in marginal tax rate in the foreign country

Question

Quizplus · Accepted Answer

A change in marginal tax rate in the foreign country is not likely to cause a money demand shock because it does not directly affect the domestic economy or exchange rate. A sudden decline or increase in domestic output can cause a money demand shock as it impacts the demand for money in the economy. A decline in foreign interest rates can cause a money demand shock as it increases the attractiveness of foreign assets, leading to capital outflows and a decrease in the demand for domestic money.

Which of the Following Is NOT Likely to Cause a Money