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 fixed 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) a fall in income but a rise in net exports.

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model with fixed exchange rates, a fall in consumer confidence reduces consumption, leading to a decrease in aggregate demand and income. The fixed exchange rate prevents currency depreciation, so net exports do not rise to offset the fall in income.

A Fall in Consumer Confidence About the Future, Which Induces