Fiscal Policy Is Most Effective in a Fixed-Rate System When

question 25

Essay

Fiscal policy is most effective in a fixed-rate system when capital is perfectly mobile because there is no domestic "crowding out." Explain what is meant by the term "crowding out," and then critically evaluate the previous statement using the IS/LM/BP model.

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Definitions:

Long-term Borrowings

Loans and financial obligations lasting more than one year, used by businesses to finance major investments or acquisitions.

Financing Activities

Transactions and events that affect the long-term liabilities and equity of a company, including issuing debt and equity.

Note Payable

A written promise to pay a specific sum of money to a bearer or a specified person at a future date or on demand.

Cash Dividends

Profits paid out to shareholders by a corporation based on the number of shares they own.