Under a fixed exchange-rate system and high capital mobility, other things equal an expansionary fiscal policy leads to a
A) trade deficit and capital inflow.
B) trade deficit and capital outflow.
C) trade surplus and capital inflow.
D) trade surplus and capital outflow.

Question

Quizplus · Accepted Answer

Under a fixed exchange-rate system with high capital mobility, an expansionary fiscal policy typically leads to increased domestic interest rates to finance the deficit, attracting foreign capital and leading to a capital inflow. The increased demand for domestic goods and services also increases imports, leading to a trade deficit.

Under a Fixed Exchange-Rate System and High Capital Mobility, Other