Under a fixed exchange rate system,an expansionary fiscal policy such as an increase in government expenditures will lead to a(n)________ in real GDP and a ________ inflation rate.
A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, the exchange rate is fixed, so an expansionary fiscal policy will increase the demand for goods and services, leading to an increase in real GDP. However, since the exchange rate is fixed, the increase in demand will also lead to a higher inflation rate.

Under a Fixed Exchange Rate System,an Expansionary Fiscal Policy Such