Illustrate the effectiveness of monetary policy with fixed ...

[ETearle]

Illustrate the effectiveness of monetary policy with fixed exchange rates.
 
  What will be an ideal response?

Question 2

Fiscal expansion under fixed exchange rates will have what temporary effect?
 
  A) the money supply will decrease.
  B) output will decrease.
  C) the exchange rate will increase.
  D) the exchange rate will decrease.
  E) there will be no effect.

[mariahkathleeen]

Answer to Question 1

The required intervention to maintain the fixed exchange rate will undo any effect on income of an increase or decrease in the money supply. Illustrate by shifting LM curve and then explaining how intervention will return LM to original position.

Answer to Question 2

D