Under a Fixed Exchange Rate System, a Neutral Fiscal Policy

question 57

Multiple Choice

Under a fixed exchange rate system, a neutral fiscal policy, and perfect capital mobility, a contractionary monetary policy is ineffective because the

• A) Federal Reserve's attempt to reduce the money supply will be offset by an inflow of gold.
• B) Fed's attempt to reduce the money supply raises interest rates; capital flows into the United States from other countries; and the U.S. money supply increases.
• C) capital account is unaffected by the Fed's actions.
• D) Fed's attempt to reduce the money supply reduces interest rates; capital flows out of the United States; and the U.S. money supply increases.

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