According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______ and in an economy with fixed exchange rates import restrictions cause net exports to ______.
A) increase; increase
B) increase; remain unchanged
C) remain unchanged; remain unchanged
D) remain unchanged; increase

Question

Quizplus · Accepted Answer

The Mundell-Fleming model suggests that import restrictions lead to a decrease in income, which leads to a decrease in imports. In an economy with flexible exchange rates, this decrease in imports leads to an increase in net exports as the exchange rate adjusts to maintain the balance of payments. However, in an economy with fixed exchange rates, the decrease in imports causes a surplus in the balance of payments, which leads to a decrease in net exports. Therefore, import restrictions cause net exports to remain unchanged in an economy with fixed exchange rates.

According to the Mundell-Fleming Model, Import Restrictions in an Economy