In the short run, fiscal policy is a powerful tool under fixed exchange rates.

Question

Quizplus · Accepted Answer

Under fixed exchange rates, fiscal policy is more effective because the central bank must intervene in the foreign exchange market to maintain the fixed rate, which often involves adjusting the money supply in a way that complements the fiscal expansion or contraction, without the offsetting effect of changing exchange rates that would occur under floating rates.

In the Short Run, Fiscal Policy Is a Powerful Tool