If Capital Is Imperfectly Mobile (With BP Flatter Than LM)

question 14

Essay

If capital is imperfectly mobile (with BP flatter than LM), explain why governments find fiscal policy less effective under flexible rates compared to fixed rates. Is fiscal policy ever completely ineffective? If so, under what conditions? If not, why not?

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Definitions:

Price-to-earnings Ratios

A valuation metric that compares the market price of a stock to its per-share earnings, used to evaluate if a stock is over or undervalued.

Weak Form

A market efficiency hypothesis that suggests past prices and volumes have no effect on future prices, implying that past market data cannot be used to predict future market movements.

Efficient Market Hypothesis

A theory suggesting that at any given time, securities prices reflect all available information, meaning it's impossible to consistently achieve higher returns.

Superior Returns

Returns that exceed the performance of a benchmark index or the average returns of a particular investment category.