According to the Mundell-Fleming model, under:
A) floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.
B) both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does not.
C) both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does not.
D) floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.

Question

Quizplus · Accepted Answer

The Mundell-Fleming model suggests that under floating exchange rates, a monetary expansion increases income because it can affect the exchange rate and thus impact net exports positively. However, a fiscal expansion has little effect on income because it leads to an appreciation of the currency, which can offset the initial stimulus. Under fixed exchange rates, the opposite is true: a fiscal expansion can raise income because the exchange rate cannot adjust to offset the fiscal stimulus, while a monetary expansion has little effect on income since the central bank must intervene in the forex market to maintain the fixed exchange rate, neutralizing the monetary expansion's impact on income.

According to the Mundell-Fleming Model, Under