Everything else remaining unchanged, the effect of domestic spending shocks on a country with a floating exchange rate differs depending on:
A)whether sterilized intervention is used or not.
B)the mobility of capital across countries.
C)the current trade balance situation of the country.
D)the interest rate differential between the country and its trading partners.

Question

Quizplus · Accepted Answer

The mobility of capital across countries affects the effectiveness of domestic spending shocks in a country with a floating exchange rate. If capital is highly mobile, domestic spending shocks will have a smaller impact on the exchange rate and a larger impact on domestic output.

Everything Else Remaining Unchanged, the Effect of Domestic Spending Shocks