Under fixed rates, which one of the following statements is the MOST accurate?
A) Fiscal policy can affect output, employment and international reserves at the same time.
B) Fiscal policy can affect only employment.
C) Fiscal policy can affect only international reserves.
D) Fiscal policy can affect only output and employment.
E) Fiscal employment can affect only output and international reserves.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, fiscal policy can indeed impact output, employment, and international reserves simultaneously. When the government increases spending (expansionary fiscal policy), it can boost domestic output and employment. However, this can also lead to an increase in imports due to higher domestic demand, affecting the balance of payments and potentially leading to a decrease in international reserves as the government or central bank intervenes in the foreign exchange market to maintain the fixed exchange rate.

Under Fixed Rates, Which One of the Following Statements Is