Economics · Mundell-Fleming Model
Assertion (A): Under the Mundell–Fleming model with perfect capital mobility, fiscal policy is ineffective in a small open economy operating under a flexible exchange rate regime. Reason (R): Fiscal expansion raises the domestic interest rate, attracting capital inflows that appreciate the exchange rate and fully crowd out net exports.
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A is false but R is true
- 2A is true but R is false
- 3Both A and R are true but R is not the correct explanation of A
- 4Both A and R are true and R is the correct explanation of A✓
Correct answer
Both A and R are true and R is the correct explanation of A
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