According to the Mundell-Fleming model, under floating exchange rates a fiscal expansion:
A) lowers the exchange rate, but a monetary expansion raises it.
B) raises the exchange rate, but a monetary expansion or an import restriction lowers it.
C) or an import restriction lowers the exchange rate, but a monetary expansion raises it.
D) or an import restriction raises the exchange rate, but a monetary expansion lowers it.

Question

Quizplus · Accepted Answer

Under floating exchange rates, a fiscal expansion increases interest rates, attracting foreign capital and appreciating the currency. Import restrictions can also appreciate the currency by reducing the demand for foreign currency. Conversely, a monetary expansion lowers interest rates, leading to currency depreciation.

According to the Mundell-Fleming Model, Under Floating Exchange Rates a Fiscal