Under perfect capital mobility and fixed exchange rates, expansionary _____ is a futile attempt because the _____.
A)fiscal policy; LM curve effectively is vertical.
B)monetary policy; LM curve effectively is the same as the FE curve.
C)fiscal policy; interest rate does not change.
D)monetary policy; IS curve will shift to the left.

Question

Quizplus · Accepted Answer

Under perfect capital mobility and fixed exchange rates, the LM curve effectively becomes the same as the FE (foreign exchange) curve. Therefore, any attempt at expansionary monetary policy (shifting the LM curve) will ultimately result in a change in the exchange rate, not output or interest rates. As a result, it is a futile attempt to use monetary policy to stimulate the economy.

Under Perfect Capital Mobility and Fixed Exchange Rates, Expansionary _____