Figure 12.6

Panel (a) Panel (b)
-Refer to Figure 12.6.Under a fixed exchange rate system,the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at

Question

Figure 12.6
Figure 12.6 Panel (a) Panel (b) -Refer to Figure 12.6.Under a fixed exchange rate system,the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at A) point A. B) point B. C) point C. D) point X.

Figure 12.6 Panel (a) Panel (b) -Refer to Figure 12.6.Under a fixed exchange rate system,the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at A) point A. B) point B. C) point C. D) point X.

Panel (a) Panel (b)
-Refer to Figure 12.6.Under a fixed exchange rate system,the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at

Quizplus · Accepted Answer

At point B, the economy is already at potential output, so an expansionary policy would cause an increase in inflation and no increase in output. This would cause an increase in demand for foreign currency, leading to a deficit in the balance of payments and making it difficult for the central bank to maintain the fixed exchange rate.

Figure 12.6 &Ensp; Panel (A) &Ensp; Panel (B)