Fiscal policy lacks potency under floating exchange regimes since fiscal expansion ?
Show answer Hide answer
Answer: C. crowds out exports
Explanation
Fiscal expansion under floating exchange rates increases domestic interest rates significantly. Higher interest rates attract foreign capital inflows and appreciate the domestic currency value. An appreciated currency makes exports expensive, which crowds out net exports completely. The Mundell-Fleming model analyzes open economy macroeconomic policy effectiveness thoroughly. Floating exchange rate regimes allow exchange rates to adjust freely to market pressures. High capital mobility ensures that financial capital flows rapidly across international borders.
Policymakers must consider exchange rate mechanisms when designing domestic stimulus packages. Open economies often find fiscal stimulus less effective than monetary policy adjustments. Trade balances frequently deteriorate when expansionary fiscal policy strengthens the currency. Crowding out imports contradicts the standard open economy macroeconomic crowding out mechanism. Public consumption represents a component of government spending rather than an export effect. Reducing the budget deficit contradicts the fundamental premise of expansionary fiscal policy.
Related questions
Q1. Enterprises execute multinational operations in order to ?
Show answer Hide answer
Answer: D. All of the above
Multinational corporations expand globally to access critical resources and raw material inputs. Establishing foreign manufacturing plants helps companies bypass restrictive international trade barriers. Lowering labor c...
Q2. The exchange value of which subsequent currencies declines due to chronic balance of payments shortfalls ?
Show answer Hide answer
Answer: D. Soft currency
A soft currency faces chronic balance of payments shortfalls and downward market pressure. Market participants expect its exchange value to decline steadily against other major currencies. Such depreciation reflects ongo...
Q3. Analysts hypothesize that the widening earnings gap between skilled and unskilled labor may stem from ?
Show answer Hide answer
Answer: A. decrease in the demand for unskilled workers because of increases in technology and increases in international trade
Technological advancements increase demand for skilled workers while reducing demand for routine tasks. International trade shifts manufacturing jobs abroad, lowering relative demand for unskilled labor domestically. Ski...
Q4. Export subsidies imposed by foreign governments on items where Pakistan holds comparative disadvantage ?
Show answer Hide answer
Answer: B. lead to increases in Pakistani consumer surplus
Foreign export subsidies artificially lower world prices for the subsidized traded goods. Importing nations benefit from these lower prices because consumers pay less overall. This price reduction directly expands the do...
Q5. Identify the term for the obligation requiring a buyer to settle payment for merchandise upon delivery ?
Show answer Hide answer
Answer: D. Cash on Delivery
Cash on Delivery requires buyers to pay for merchandise immediately upon physical receipt. Commercial transactions of this type protect sellers against non-payment risks upon delivery. Settling accounts instantly at drop...
Q6. Expansionary fiscal measures within the classical framework will drive aggregate demand to _______ potential output?
Show answer Hide answer
Answer: D. remain equal to
Classical macroeconomic theory posits that prices and wages adjust rapidly in markets. Expansionary fiscal measures primarily cause inflation rather than sustained real output increases. Consequently, aggregate demand ul...