- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 6. Monetary and Fiscal Policies
CFA Practice Question
In the Mundell-Fleming model, an expansionary fiscal policy:
B. will give rise to a depreciation of the domestic currency.
C. has an ambiguous impact on exchange rate.
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 |