A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:
A) a fall in consumption and income.
B) no change in consumption or income.
C) no change in income but a rise in net exports.
D) no change in income or net exports.

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model with floating exchange rates, a fall in consumer confidence that leads to increased savings and reduced spending results in lower domestic interest rates. This, in turn, causes the domestic currency to depreciate, making exports cheaper and imports more expensive. As a result, net exports increase, offsetting the initial fall in consumption, thus leaving overall income unchanged.

A Fall in Consumer Confidence About the Future, Which Induces