In a situation of imperfect short-term capital mobility between countries, if the BP curve Is flatter than the LM curve for country A, then an internal real sector shock in country A (such as an autonomous increase in real investment spending) will have a __________ Impact on A's national income under fixed exchange rates than under flexible exchange Rates; if the BP curve is steeper than the LM curve for country A, then that internal real Sector shock __________ impact on A's income under fixed exchange rates than under Flexible exchange rates.

Question

Quizplus · Accepted Answer

When the BP curve is flatter than the LM curve, it indicates that the capital mobility is quite low, and the country is not able to absorb external shocks. Hence, an internal real sector shock will have a larger impact on the country's national income under fixed exchange rates as compared to flexible exchange rates. On the other hand, when the BP curve is steeper than the LM curve, it suggests that the country has a high level of capital mobility, and hence it can easily absorb external shocks. Thus, the internal real sector shock would have a smaller impact on the country's income under fixed exchange rates as compared to flexible exchange rates.

In a Situation of Imperfect Short-Term Capital Mobility Between Countries