Fiscal Expansion under a fixed exchange has what effect(s) on the economy:
A) the money supply decreases.
B) output decreases.
C) the exchange rate increases.
D) the exchange rate decreases initially but then returns to its original point.
E) output is unchanged.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate, fiscal expansion increases output and demand for money, leading to a temporary depreciation pressure on the currency. The central bank intervenes by buying domestic currency, which increases the money supply and restores the exchange rate to its original level.

Fiscal Expansion Under a Fixed Exchange Has What Effect(s) on the Economy