Assuming imperfect capital mobility and a fixed exchange rate,then an expansionary monetary policy
A)results in a balance of payments surplus without a conflict between domestic goals and external balance.
B)results in a balance of payments deficit with a potential conflict between domestic goals and external balance.
C)will shift the LM curve to the left.
D)will have no effect on the balance of payments.

Question

Quizplus · Accepted Answer

With imperfect capital mobility, an expansionary monetary policy will lower interest rates, leading to an increase in investment and consumption. This will increase imports and decrease exports leading to a balance of payments deficit. The fixed exchange rate will prevent the adjustment of the exchange rate to restore external balance, creating a potential conflict between domestic goals (e.g., increasing employment) and external balance.

Assuming Imperfect Capital Mobility and a Fixed Exchange Rate,then an Expansionary