Question 32 (1 point) If capital is perfectly mobile and a country has floating

Question

Question 32 (1 point)

If capital is perfectly mobile and a country has floating exchange rates, expansionary _____ policy will be _____ and contractionary _____ policy will be _____.

Question 32 options:

fiscal; reinforced; monetary; hampered

fiscal; hampered; monetary; reinforced

fiscal; reinforced; fiscal; hampered

monetary; hampered; monetary; reinforced

fiscal; reinforced; monetary; hampered

fiscal; hampered; monetary; reinforced

fiscal; reinforced; fiscal; hampered

monetary; hampered; monetary; reinforced

Explanation / Answer

Mobility of Capital means just labor, Capital Factor can also travel to any place of production. If capital is perfectly mobile, and we have floating exchange rates, i.e. rates which are based on the market demand for the currency and market supply for the currency.

Expansionary polcicy means tax cut by the governement, More government spending and so on. An expansionary fiscal policy would mean more and more demand for goods and services, as a result, there will be increased production as capital is mobile and can move to any area of production. Thus fiscal policy shall be reinforced, however a contrary monetary policy would mean that lesser money supply in the economy, or the value for currency shall increase and there will be higher value for capital inputs as well as higher cost of production for the Foreign investments. Thus investments from outside the country shall be hampered. Thus option A seems correct.

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