Question: In a small open economy with perfect capital mobility, the government decides to increase investment in public infrastructure, financed entirely through foreign borrowing. Assuming the economy was initially at full employment with a balanced trade, which of the following scenarios is most likely to occur as a result of the government's action, in the short run, according to the Mundell-Fleming model under a fixed exchange rate regime? A) Interest rates will rise, causing capital outflows and an eventual decrease in net exports. B) Domestic currency will appreciate, making exports more expensive and imports cheaper, thus worsening the current account balance. C) The central bank will need to sell foreign reserves to maintain the fixed exchange rate, leading to an increase in the money supply. D) The increased government spending will crowd out private investment, but the fixed exchange rate will prevent any change in net exports. Don't use chatgpt it is giving wrong answer. Please provide valuable answer.

Question: In a small open economy with perfect capital mobility, the government decides to increase investment in public infrastructure, financed entirely through foreign borrowing. Assuming the economy was initially at full employment with a balanced trade, which of the following scenarios is most likely to occur as a result of the government's action, in the short run, according to the Mundell-Fleming model under a fixed exchange rate regime? A) Interest rates will rise, causing capital outflows and an eventual decrease in net exports. B) Domestic currency will appreciate, making exports more expensive and imports cheaper, thus worsening the current account balance. C) The central bank will need to sell foreign reserves to maintain the fixed exchange rate, leading to an increase in the money supply. D) The increased government spending will crowd out private investment, but the fixed exchange rate will prevent any change in net exports. Don't use chatgpt it is giving wrong answer. Please provide valuable answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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