In which situation is policy strengthened?

Check all correct answers
Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choice

Question

In which situation is policy strengthened?

Check all correct answers
Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choice

BlackTom AI · Accepted Answer

Mundell-Fleming model with high capital mobility: monetary policy is effective under floating exchange rates, while fiscal policy is effective under fixed exchange rates.

1) Relevant knowledge points and concepts
- Open-economy macroeconomics (Mundell-Fleming): interaction of interest rates, exchange rates, and capital flows.
- Exchange rate regimes: floating (rate determined by market) vs fixed (central bank defends a peg).
- Policy transmission: how monetary and fiscal policy affect interest rates, capital flows, exchange rates, and net exports.

2) Step-by-step reasoning
- Floating exchange rate, expansionary monetary policy:
  a. Central bank increases money supply → domestic interest rate falls.
  b. Lower domestic interest rate → capital outflow (investors seek higher returns abroad).
  c. Capital outflow → domestic currency depreciates.
  d. Depreciation increases net exports → aggregate demand rises further.
  e. Exchange-rate depreciation amplifies the original monetary stimulus. Result: monetary policy strengthened.
- Floating exchange rate, expansionary fiscal policy:
  a. Government increases spending → demand and interest rates rise.
  b. Higher interest rates → capital inflows.
  c. Capital inflows → currency appreciates.
  d. Appreciation reduces net exports, offsetting fiscal expansion. Result: fiscal policy weakened.

- Fixed exchange rate, expansionary fiscal policy:
  a. Government spending rises → interest rate pressure upward.
  b. Capital inflows (to chase higher rates) create upward pressure on the currency.
  c. To maintain the peg, central bank buys foreign currency and sells domestic currency → domestic money supply expands.
  d. The automatic monetary expansion supports higher output; fiscal policy is therefore strengthened.
- Fixed exchange rate, expansionary monetary policy:
  a. Central bank attempts to increase money supply → interest rate falls.
  b. Capital outflows put downward pressure on the peg.
  c. To defend the peg the central bank must reverse the expansion (sell reserves), eliminating the initial effect. Result: monetary policy ineffective.

3) Intermediate causal steps are shown above (interest rate → capital flows → exchange rate → net exports → aggregate demand).

4) Why the correct answers are correct
Because the transmission mechanisms described make monetary policy powerful only when the exchange rate can move (floating), and make fiscal policy powerful under a fixed peg since the central bank must accommodate balance-of-payments pressures.

5) Why other options are incorrect
- Fiscal policy with a floating exchange rate: currency appreciation from fiscal expansion offsets stimulus, so it's not strengthened.
- Monetary policy with a fixed exchange rate: defending the peg neutralizes independent monetary actions, so it is not strengthened.

6) Conclusion
Therefore the strengthened-policy situations are: Monetary policy in an open economy with a floating exchange rate, and Fiscal policy in an open economy with a fixed exchange rate — matching the provided answer.

In which situation is policy strengthened? Check all correct answers Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choiceMultiple choice

Similar Questions

Expansionary fiscal policy in an open economy with a floating exchange rate will likely:

Contractionary monetary policy in an open economy with a floating exchange rate will likely:

Contractionary monetary policy in an open economy with a fixed exchange rate will likely ____ a trade surplus.

Which is expansionary monetary policy?

Which is contractionary fiscal policy?

Which is expansionary fiscal policy?

What would raise aggregate supply (AS)?

What would shift aggregate supply (AS) to the right?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler