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    Question

    According to the Mundell-Fleming model, what will happen

    in the short run if an expansionary fiscal policy is undertaken under flexible exchange rates and perfect capital mobility?
    A National income increases and exchange rate remains unchanged Correct Answer Incorrect Answer
    B National income increases and exchange rate appreciates Correct Answer Incorrect Answer
    C National income remains unchanged and exchange rate depreciates Correct Answer Incorrect Answer
    D National income remains unchanged and exchange rate appreciates Correct Answer Incorrect Answer

    Solution

    According to the Mundell-Fleming model, in the short run, if an expansionary fiscal policy is undertaken under flexible exchange rates and perfect capital mobility, national income remains unchanged and the exchange rate appreciates. This is because the fiscal expansion leads to capital inflows, which cause the currency to appreciate, offsetting the expansionary effect on income.

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