Suppose a country switches from a flexible to a fixed exchange rate. Which of the following will occur as a result of this change?
A) Both fiscal and monetary policy will become more effective in changing GDP.
B) A given change in government spending will now have a greater effect on output.
C) Both fiscal and monetary policy will become completely ineffective in changing GDP.
D) Monetary policy will become a more effective tool for changing output.
E) A given change in government spending will now have a smaller effect on output.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate, fiscal policy becomes more effective because the central bank must intervene to maintain the exchange rate, often by adjusting the money supply, which can amplify the effects of fiscal policy on output.

Suppose a Country Switches from a Flexible to a Fixed