In a Flexible Exchange Rate System with Perfect Capital Mobility

question 6

Multiple Choice

In a flexible exchange rate system with perfect capital mobility, if restrictive fiscal policy is implemented, we will see

• A)a shift of the IS-curve to the left followed by a depreciation of the currency and a subsequent shift of the IS-curve back to its original position
• B)a shift of the IS-curve to the left followed by a depreciation of the currency and a subsequent shift of the LM-curve to the left, leaving the domestic interest rate unchanged
• C)a shift of the IS-curve to the left followed by an appreciation of the currency
• D)a shift of the LM-curve to the left followed by an appreciation of the currency and a subsequent shift of the LM-curve back to its original position
• E)a temporary decrease in the interest rate but a long-term decrease in the level of output

---

Definitions:

Effective Capacity

The maximum output a system is capable of achieving under normal operating conditions, taking into account potential constraints.

Utilization

Refers to the extent to which a system, resource, or workforce is used to achieve its maximum potential output or capacity.

Break-Even Point

The point at which total costs and total revenue are equal, meaning no net loss or gain is incurred; a critical measure of financial viability for a product or business.

Variable Cost

Costs that change in proportion to the level of production or sales volume, such as raw materials and direct labor.