For this question,assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility exists.Given this information,which of the following will occur?
A)the domestic and foreign interest rates must be equal.
B)the central bank cannot use monetary policy to affect domestic output.
C)an expansionary fiscal policy will require that the central bank increase the money supply.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime with perfect capital mobility, the exchange rate is fixed and the interest rate is determined by the world interest rate. Therefore, the domestic and foreign interest rates must be equal (option A). Since the exchange rate is fixed, the central bank cannot use monetary policy to affect domestic output (option B). An expansionary fiscal policy will require that the central bank increase the money supply to maintain the fixed exchange rate (option C). Therefore, all of the above options are correct (option D).

For This Question,assume That the Economy Is Operating in a Fixed