Monetary expansion, with perfect capital mobility, is effective in improving international price competitiveness of a country in:
A)the short-run with floating exchange rates.
B)the long-run with floating exchange rates.
C)the short-run with fixed exchange rates.
D)the long-run with fixed exchange rates.

Question

Quizplus · Accepted Answer

In the short-run with floating exchange rates, monetary expansion can lead to a depreciated exchange rate, making exports cheaper and more competitive internationally. This can improve the country's balance of trade and therefore improve its international price competitiveness. However, in the long run with floating exchange rates, the effects of monetary expansion can be offset by inflation, reducing the competitive advantage gained from the depreciated exchange rate. The short-run effects of monetary expansion with fixed exchange rates may be limited, as the exchange rate is fixed and unable to adjust to changes in monetary policy. The long-run effects of monetary expansion with fixed exchange rates may depend on the specifics of the country's exchange rate regime and the degree of capital mobility.

Monetary Expansion, with Perfect Capital Mobility, Is Effective in Improving