Under a fixed exchange rate regime,expansionary fiscal policy will tend to cause which of the following?
A)an increase in imports
B)an increase in net exports
C)a reduction in investment
D)all of the above

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, the exchange rate remains constant and is not allowed to float freely. This means that an expansionary fiscal policy that increases government spending and/or reduces taxes will lead to a domestic increase in demand for goods and services. Since the exchange rate is fixed, this increase in demand cannot be met by an increase in the supply of domestically produced goods and services alone, and imports will have to increase to meet the excess demand. As a result, choice A is the correct answer. Choice B is incorrect since an increase in imports does not necessarily imply an increase in net exports, and choice C is not necessarily true as investment may be encouraged by the expansionary fiscal policy.

Under a Fixed Exchange Rate Regime,expansionary Fiscal Policy Will Tend