A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:
A) Expansionary fiscal policy
B) Expansionary monetary policy
C) Contractionary fiscal policy
D) Contractionary monetary policy

Question

Quizplus · Accepted Answer

In a system of floating exchange rates with high capital mobility, expansionary monetary policy is the most effective way to combat a recession. This is because interest rates have a greater impact on capital flows and exchange rates, which are key to stimulating demand and economic growth. Expansionary fiscal policy may also be effective, but it may lead to currency depreciation and higher inflation in the long run. Contractionary monetary policy and fiscal policy would be counterproductive in a recession, as they would further dampen demand and worsen the economic situation.

A System of Floating Exchange Rates and High Capital Mobility