Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that a fiscal contraction is implemented. Such a policy will tend to cause which of the following to occur?
A) A decrease in the exchange rate.
B) A decrease in Y.
C) A decrease in the domestic interest rate.
D) An increase in the money supply.
E) An increase in the price level.

Question

Quizplus · Accepted Answer

A fiscal contraction reduces aggregate demand, leading to a decrease in output (Y) under a fixed exchange rate regime.

Assume That Policy Makers Are Pursuing a Fixed Exchange Rate