Under a fixed exchange-rate system and high capital mobility,an expansion in the domestic money supply leads to:
A) Trade-account deficit and a capital-account surplus
B) Trade-account deficit and a capital-account deficit
C) Trade-account surplus and a capital-account surplus
D) Trade-account surplus and a capital-account deficit

Question

Quizplus · Accepted Answer

Under a fixed exchange-rate system, an increase in domestic money supply would lead to an increase in demand for foreign currency to purchase goods and services, leading to an imbalance in the trade account and a trade-account deficit. To finance the deficit, more capital inflows are needed, which would result in a capital-account deficit.

Under a Fixed Exchange-Rate System and High Capital Mobility,an Expansion