A domestic spending shock are likely to be least disruptive:
A)under a floating exchange-rate system when there is high capital mobility.
B)under a fixed exchange-rate system when there is high capital mobility.
C)under a fixed exchange-rate system without sterilization.
D)under a floating exchange-rate system when there is low capital mobility.

Question

Quizplus · Accepted Answer

Under a floating exchange-rate system when there is high capital mobility, currency is free to fluctuate according to market demand, and international capital flows can help absorb the shock. This means that a domestic spending shock would be least disruptive in this scenario because the economy can adjust to changes more easily. In a fixed exchange-rate system, however, the shock could lead to a destabilizing imbalance in the balance of payments, and in the absence of sterilization, could result in inflationary pressures. Low capital mobility also limits the ability of the economy to absorb shocks.

A Domestic Spending Shock Are Likely to Be Least Disruptive