Suppose there are two countries that are identical in every way with the following exception.Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime.Suppose taxes are increased in both countries rises by the same amount.Given this information,we know that
A)the change in output in A will be greater than in B.
B)the change in output in B will be greater than in A.
C)the change in output will be the same in both countries.
D)the relative output effects are ambiguous.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, monetary policy is constrained, so fiscal policy changes like tax increases have a more pronounced effect on output. In contrast, a flexible exchange rate regime allows for monetary policy adjustments that can offset fiscal policy changes, leading to a smaller change in output.

Suppose There Are Two Countries That Are Identical in Every