Under a system of flexible exchange rates and perfect capital mobility, restrictive monetary policy will in the long run
A)lower inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate the same
B)increase the real interest rate
C)lower inflation, the exchange rate, and the real interest rate
D)leave output the same, while lowering the real interest rate and the real exchange rate
E)reduce real money balances, domestic prices, and the real exchange rate

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates and perfect capital mobility, a restrictive monetary policy will, in the long run, lower inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate unchanged. This is because in the long run, prices adjust to the changes in monetary policy, neutralizing effects on real variables.

Under a System of Flexible Exchange Rates and Perfect Capital