Which one of the following statements is the MOST accurate?
A) Fiscal policy has the same effect on employment under fixed and flexible exchange rate regimes.
B) Fiscal policy affects employment less under fixed than under flexible exchange rate regimes.
C) Fiscal policy affects employment more under fixed than under flexible exchange rate regimes.
D) Fiscal policy cannot affect employment under fixed exchange rate but does affect output under flexible exchange rate regimes.
E) Fiscal policy can affect employment under fixed exchange rate regimes, but does not affect output under flexible exchange rate regimes.

Question

Quizplus · Accepted Answer

Fiscal policy tends to have a more pronounced effect on employment under fixed exchange rate regimes because the central bank must intervene in the currency market to maintain the fixed rate, often leading to changes in the money supply that can influence employment levels. Under flexible exchange rates, fiscal policy's impact on employment can be offset by currency value adjustments.

Which One of the Following Statements Is the MOST Accurate