Suppose a country has a floating exchange rate and no capital controls. It also has a recessionary gap. It tackles this with an expansionary fiscal policy. In the final equilibrium people expect its exchange rate to stay at its new value. Which of the following statements is false? a) There will be an initial increase in demand, probably government purchases and consumer spending. O b) As demand increases, incomes and money demand start to increase, causing a rise in the interest rate and, in turn, in the exchange rate. O c) The interest rate must end up at its initial value, so money demand must return to its original level. O d) Output will end up higher than it was initially.

Suppose a country has a floating exchange rate and no capital controls. It also has a recessionary gap. It tackles this with an expansionary fiscal policy. In the final equilibrium people expect its exchange rate to stay at its new value. Which of the following statements is false? a) There will be an initial increase in demand, probably government purchases and consumer spending. O b) As demand increases, incomes and money demand start to increase, causing a rise in the interest rate and, in turn, in the exchange rate. O c) The interest rate must end up at its initial value, so money demand must return to its original level. O d) Output will end up higher than it was initially.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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