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Please give a short answer to why what option is correct. Thanks7. Suppose there are two countries that are identical in every way with the following excep- tion. Country A is pursuing a fi

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7. The relative effectiveness of fiscal and monetary policy to affect the quantity of GDP is different under fixed exchange rate regime and flexible exchange rate regime. Fiscal policy is less effective than monetary policy under flexible exchange rate. But the effectiveness of fiscal policy is more under fixed exchange rate than that of the monetary policy.

Taxation is a part of fiscal policy and country A is following the fixed exchange rate. Then the effect of the increased taxation will be higher in country A than B.

Answer: A. the change in output in A will be greater than in B.

8. The rate of interest in an economy is largely influenced by the borrowing by the government to finance its expenditure. Therefore a reduction in borrowing due to fall in government expenditure decrease the rate of interest. The fall in the rate of interest increase expenditure (availability of more credit at lower interest rate induces consumption and investment expenditure).

Answer: A. A reduction in i and an increase in E

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