Other things equal, a domestic monetary or financial shock (a shift in the LM curve) Tends to produce what relative degree of GDP change for the home country under a Situation of flexible exchange rates compared to a situation of fixed exchange rates?

Question

Quizplus · Accepted Answer

When there is a domestic monetary or financial shock, a shift in the LM curve, a flexible exchange rate allows the exchange rate to adjust to balance the domestic demand for and supply of goods and services. This can result in a larger change in GDP for the home country compared to a fixed exchange rate system, where the exchange rate is fixed and cannot adjust to the shock. In a fixed exchange rate system, the central bank must use its international reserves to maintain the fixed rate, which can lead to a reduction in the money supply and a contraction in output.

Other Things Equal, a Domestic Monetary or Financial Shock (A