Under a Floating Exchange Rate Regime with a Low Degree

question 52

Multiple Choice

Under a floating exchange rate regime with a low degree of capital mobility, an expansionary fiscal policy will most likely create pressure on:

• A)monetary authorities to revalue the domestic currency.
• B)the domestic currency to depreciate.
• C)the domestic currency to appreciate.
• D)monetary authorities to devalue the domestic currency.

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Definitions:

Diminishing Returns

A principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other inputs remain constant.

Subsistence

The minimum level of essentials (such as food and shelter) necessary for an individual to survive.

Catch-Up Effect

The theory suggesting that less developed countries can grow at a faster rate than developed countries because they can adopt existing technologies and best practices.

Diminishing Returns

A principle stating that if one factor of production is increased while others remain constant, the overall returns will eventually decrease after a certain point.