With perfect capital mobility and other things equal, an exogenous increase in demand for a country's exports will lead to __________ increase in the country's national income under fixed exchange rates than under flexible exchange rates.

Question

Quizplus · Accepted Answer

With fixed exchange rates, an increase in demand for a country's exports will lead to an increase in its overall income since the country cannot adjust its exchange rates to balance out any gains from increased exports. Under flexible exchange rates, the country's currency would appreciate due to increased demand, making its exports more expensive and potentially reducing the overall income gain. Therefore, a greater increase in national income will occur under fixed exchange rates.

With Perfect Capital Mobility and Other Things Equal, an Exogenous