Given an open economy with high capital mobility, under a system of managed-floating exchange rates with heavy exchange rate intervention
A) fiscal policy is more successful in promoting internal balance, while monetary policy is less successful.
B) monetary policy is more successful in promoting internal balance, while fiscal policy is less successful.
C) both fiscal policy and monetary policy are equally successful in promoting internal balance.
D) neither fiscal policy nor monetary policy are successful in promoting internal balance.

Question

Quizplus · Accepted Answer

Under a system of managed-floating exchange rates with heavy exchange rate intervention in an open economy with high capital mobility, monetary policy is more successful in promoting internal balance, while fiscal policy is less successful. This is because heavy exchange rate intervention can limit the effectiveness of fiscal policy by offsetting any expansionary effects with a corresponding appreciation of the currency. On the other hand, monetary policy can still influence interest rates and ultimately aggregate demand even with exchange rate intervention.

Given an Open Economy with High Capital Mobility, Under a System