According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to ______, and expansionary monetary policy causes net exports to ______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy (such as increasing government spending or reducing taxes) leads to an increase in interest rates and a strengthening of the domestic currency. This, in turn, makes the country's exports more expensive and imports cheaper, causing net exports to decrease. On the other hand, expansionary monetary policy (such as reducing interest rates or increasing the money supply) leads to a weakening of the domestic currency and an increase in demand for exports, causing net exports to increase. Therefore, the correct answer is option D: decrease; increase.

According to the Mundell-Fleming Model, in an Economy with Flexible