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

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