In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:
A) and net exports both to fall.
B) to fall while net exports are unchanged.
C) to be unchanged and net exports to fall.
D) and net exports to both be unchanged.

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate leads to capital outflows, which reduces domestic income. However, net exports remain unchanged because the exchange rate is fixed, preventing any change in the trade balance.

In the Mundell-Fleming Model with a Fixed Exchange Rate, a Rise