Assuming perfect capital mobility and a fixed exchange rate,then an increase in government spending shifts

Question

Quizplus · Accepted Answer

An increase in government spending will increase demand for goods and services, shifting the IS schedule to the right. This will raise the interest rate and cause an inflow of capital into the economy, putting upward pressure on the exchange rate. To maintain the fixed exchange rate, the central bank must buy up foreign currency, which increases the money supply and shifts the LM schedule to the right. Therefore, both the IS and LM schedules shift to the right.

Assuming Perfect Capital Mobility and a Fixed Exchange Rate,then an Increase