Fiscal policies are less effective when the exchange rate is flexible and the economy is open because in an open economy, changes in fiscal policies can lead to capital inflows and outflows that affect the exchange rate. When the exchange rate is flexible, these changes in capital flows can offset the impact of the fiscal policy. Therefore, fiscal policies are less effective in an open economy with a flexible exchange rate.

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Fiscal Policies Are

Question 241

Multiple Choice

Fiscal policies are

A) less effective when the exchange rate is flexible and the economy is closed.
B) less effective when the exchange rate is flexible and the economy is open.
C) more effective when the exchange rate is flexible and the economy is closed.
D) less effective when the exchange rate is fixed and the economy is open.

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