According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to ______ and expansionary monetary policy causes the exchange rate to ______.
A) rise; rise
B) rise; fall
C) fall; fall
D) fall; rise

Question

Quizplus · Accepted Answer

According to the Mundell-Fleming model, expansionary fiscal policy causes an increase in income, which leads to an increase in demand for imports, leading to an increase in demand for foreign currency, which causes the exchange rate to rise. On the other hand, expansionary monetary policy causes a decrease in interest rates, which leads to capital outflows, causing a decrease in demand for the home currency and an increase in supply, leading to a decrease in the exchange rate. Therefore, expansionary fiscal policy causes the exchange rate to rise and expansionary monetary policy causes the exchange rate to fall.

According to the Mundell-Fleming Model, in an Economy with Flexible