Answer to Question #221078 in Macroeconomics for DARRYL

Question

With the aid of diagrams, brieftly explain the effectiveness of fiscal and monetary policy under fixed exchange rate system with perfect capital mobility within the IS-LM-BOP framework

Answer 1

In this instance, the effectiveness of monetary and fiscal policy can be summarized as follows: fiscal policy is effective under stable exchange rates, whereas monetary policy is absolutely ineffectual. Fiscal policy is ineffectual and monetary policy is effective when exchange rates are flexible.