Question

According to the Mundell-Fleming model, under: a. floating exchange rates, a monetary expansion raises income, whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income, whereas a monetary expansion does not b. both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does not. both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does not. d. floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.

Answer 1

UM LM irit ES Ez irit I'S' IS warncy. So due to which L.M have shift Lightwords from LM'HOLM and outlet instehen Expansi@naty Fiscal.Policy sendes. Fixed Exchange Rate So due to expansionary fiscal folicy Is wewe Shift rightwards from I.5 do I s'die to which domestic interest rate will be higher then other country winterest rate. These will be laikital inflow and Bop as in surflus. Under fixed exchange rate, bank neollibeef exchange date unchanged due to which entsal bark stast from 41 20 42. Polity is effective .y Yo a z 22:25REMILA

Exchasibrary Monetary Policy in fired.exchange Rate +M. z LM ² Ei trois tip IS 4 y2 Arafat (1) Se due to exposeimasy miebetory folicy.11.wowe Shifts. LM' 48 LM2 due to which fossign sintest rate blome greates theth Countrie interest rate licin. and outhut increases. Que to decrease in interest rate. There will be capital outflow and Bol is in defiit. Under fixed exchange date, bokke will keep exchange rate sate unchanged due to ishich central book. start selling foreign currency and Burchase_home.comtry LusssacySe due to Which LM conse shifts_leftwosch again. and come back to Elwhere icif. so polity is ineffective.

Esterisa fiscal folicy wondes Elexible exchange-late DOV Ez Wolf T-(FI E, Is! I'S so due to exhalionasiny Biscal folicy. Is curre Shifts rightwards from Is to is due to which domestie interest rate as higher than other counterus interest rate (is if Que to increase in domestic interest rate exchange rate will fall which results in. ... depreciation of worney which further lead to decrease in net exhorts So due to decrease a in net exorts, I.S core come books to its Original fossition with some Buthent..so is ineffective . Policy

i Echosionary Monetary Policy undes, Elexible Exchange Rate 2M LM E3 DELF i zip IS' I) y yz yz so due to expansionary mbretery kolicy: LM curse shift rightwards from LM" to Ly due to which foreign-interest inte become greates then comtries internet rate (icif) and output increases to Y2. Due to deisease in sintesetsate sundes flexible exchange Setty exchongrate is flexible there will increase in exchange sate, due to increase in exchange rates there will be cofreciation of home carenly due to which exhorts cinerealet ind I:s wowe Shift sightwards Butkut increases to 4.3. As in this outfunt increass. So policy is effective

Hence under floating exchange rate , expansion monetary policy is effective..while under fixed exchange rate , fiscal policy is effective.

Hence (A) part is a correct answer