If capital is perfectly mobile and a country has floating exchange rates, expansionary _____ policy will be _____, and contractionary _____ policy will be _____.
A) fiscal; reinforced; monetary; hampered
B) fiscal; hampered; monetary; reinforced
C) fiscal; reinforced; fiscal; hampered
D) monetary; hampered; monetary; reinforced

Question

Quizplus · Accepted Answer

With perfect capital mobility and floating exchange rates, fiscal expansionary policy will result in an increase in interest rates, which will attract foreign capital and appreciate the currency, thereby hampering the expansionary policy. On the other hand, monetary contractionary policy will result in a decrease in interest rates, which will discourage foreign capital and depreciate the currency, thereby reinforcing the contractionary policy. Hence, fiscal policy will be hampered, and monetary policy will be reinforced in such a scenario. Therefore, the correct answer is option B.

If Capital Is Perfectly Mobile and a Country Has Floating