Which one of the following statements is the MOST accurate?
A) Fiscal policy has the same effect on output under fixed and flexible exchange rate regimes.
B) Fiscal policy affects output more under fixed than under flexible exchange rate regimes.
C) Fiscal policy affects output less under fixed than under flexible exchange rate regimes.
D) Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes.
E) Fiscal policy can affect output under fixed exchange rate but does not affect output under flexible exchange rate regimes.

Question

Quizplus · Accepted Answer

Fiscal policy tends to have a more significant impact on output under a fixed exchange rate regime because the central bank must intervene in the currency market to maintain the peg, often leading to changes in the money supply that can amplify the effects of fiscal policy. Under a flexible exchange rate, fiscal expansion can lead to currency appreciation, which can offset some of the expansionary effects on output.

Which One of the Following Statements Is the MOST Accurate