Consider Mundell's model under fixed exchange rate and select the false statement from the following statements:
A) Monetary policy is ineffective to remove recessionary gap.
B) Fiscal policy has strong short-run effects to fight recession.
C) Monetary policy is powerful, while fiscal policy is powerless.
D) If the world interest rate increases, the domestic economy's investment will decline and its GDP will decline.

Question

Quizplus · Accepted Answer

Under Mundell's model with a fixed exchange rate, monetary policy is ineffective because any increase in the money supply would lead to a balance of payments deficit, necessitating the central bank to sell foreign reserves to maintain the fixed exchange rate, thereby neutralizing the initial monetary expansion. Fiscal policy, on the other hand, is effective in influencing the economy's output.

Consider Mundell's Model Under Fixed Exchange Rate and Select the False