If exchange rates are fixed and the money supply is held constant, a contractionary fiscal policy leads to a(n) _____ in interest rates and a capital _____.

Question

Quizplus · Accepted Answer

A contractionary fiscal policy reduces government spending or increases taxes, leading to lower aggregate demand and economic activity. With fixed exchange rates and constant money supply, this results in decreased interest rates, causing capital to flow out as investors seek higher returns elsewhere.

If Exchange Rates Are Fixed and the Money Supply Is