In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?
A) by increasing government expenditures
B) by increasing tax rates
C) by increasing the money supply
D) by decreasing the money supply

Question

Quizplus · Accepted Answer

In a small open economy with fixed exchange rates and perfect capital mobility, monetary policy is ineffective in increasing aggregate demand. However, increasing government expenditures can lead to an increase in overall demand and output levels. This is because an increase in government expenditures will lead to an increase in demand for goods and services, which will lead to an increase in output levels. As a result, aggregate demand can be increased without affecting the exchange rate.

In a Small Open Economy with Perfect Capital Mobility, If