CFA Practice Question

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CFA Practice Question

In the Mundell-Fleming model, an expansionary fiscal policy:

A. will give rise to an appreciation of the domestic currency.
B. will give rise to a depreciation of the domestic currency.
C. has an ambiguous impact on exchange rate.
Correct Answer: C

It will induce a capital inflow because it results in a rise in interest rates. However it will also contribute to a deterioration of the trade balance which is negative for the domestic currency. The net result depends on how mobile capital flows are.

User Contributed Comments 2

User Comment
davcer capital mobility should be known
ynaghibi I think that was the point of the question. If you don't know capital mobility, it will have an ambiguous effect
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