When comparing monetary and fiscal policy under fixed and floating exchange rate regimes, which of the following statements is FALSE?
A) In a floating exchange rate regime, an expansionary monetary policy is effective by stimulating spending and by depreciating the currency.
B) In a floating exchange rate regime, an expansionary fiscal policy is effective by stimulating spending, though there may be crowding-out effects due to higher rates of interest and currency appreciation.
C) In a fixed exchange rate regime, an expansionary monetary policy is effective by stimulating spending; it has no impact on the currency value or the trade balance.
D) In a fixed exchange rate regime, an expansionary fiscal policy is effective by stimulating spending, as long as the parallel expansionary monetary policy keeps exchange rates stable.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, an expansionary monetary policy would typically lead to a decrease in interest rates, which could result in capital outflows and pressure on the currency to depreciate. To maintain the fixed exchange rate, the central bank would need to sell foreign reserves to buy domestic currency, which could affect the currency value and potentially impact the trade balance, contrary to the statement in option C.

When Comparing Monetary and Fiscal Policy Under Fixed and Floating