If Exchange Rates Are Flexible and Capital Is Perfectly Mobile

question 30

Multiple Choice

If exchange rates are flexible and capital is perfectly mobile, money expansion will lead to

• A)an immediate adjustment in the exchange rate, but a gradual adjustment in prices
• B)an immediate change in competitiveness
• C)a decrease in interest rates and a capital outflow in the short run
• D)a proportionate increase in money, prices, and the exchange rate in the long run, leaving output and real money balances unchanged
• E)all of the above

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Definitions:

Identity

The distinct characteristics, personality, or qualities that make an individual or group unique.

Quantity Theory of Money

A theory that relates the money supply to the price level and the rate of economic growth.

Money Supply

The sum of all financial assets, encompassing cash and deposits in banks, present within an economy at a given moment.

Price Level

An indicator that measures the typical prices for a comprehensive selection of goods and services within the economy.