Under a fixed exchange-rate system and high capital mobility,an expansionary fiscal policy leads to a:
A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question

Quizplus · Accepted Answer

Under a fixed exchange-rate system with high capital mobility, expansionary fiscal policy increases domestic interest rates, attracting foreign capital and leading to a capital-account surplus. This capital inflow appreciates the currency, making exports more expensive and imports cheaper, resulting in a trade-account deficit.

Under a Fixed Exchange-Rate System and High Capital Mobility,an Expansionary