Assume perfect capital mobility and a fixed exchange rate system.Then,an increase in government spending would shift the
A)LM schedule to the left.
B)BP schedule to the right.
C)BP schedule to the left.
D)IS schedule to the right.

Question

Quizplus · Accepted Answer

An increase in government spending under a fixed exchange rate system would increase aggregate demand, shifting the IS schedule to the right. This is because higher government spending directly increases aggregate demand, leading to higher income and output levels at any given interest rate.

Assume Perfect Capital Mobility and a Fixed Exchange Rate System