A fixed exchange rate, plus perfect capital mobility, ________ the scope for monetary policy, and
_________ the effectiveness of fiscal policy.
A) undermines, undermines
B) undermines, enhances
C) enhances, undermines
D) enhances, enhances

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system with perfect capital mobility, monetary policy is largely ineffective because domestic interest rates must align with the global rates to maintain the fixed exchange rate, limiting the central bank's ability to influence the domestic economy. However, fiscal policy becomes more effective because government spending or tax changes can have a more direct impact on aggregate demand without being offset by changes in the exchange rate.

A Fixed Exchange Rate, Plus Perfect Capital Mobility, ________ the Scope