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Posted: June 28th, 2023
Suppose a country has a floating exchange rate and no capital controls. It also has a recessionary gap. It tackles this with an expansionary monetary policy. In the final equilibrium people expect its exchange rate to stay at its new value. Which of the following statements isfalse?a)The interest rate will initially fall but must in the end return to its initial value.b)Consumer spending and investment will initially increase, but must in the end return to their initial values.c)Money demand must end up higher that it was initially.d) The exchange rate must end up at its initial value.
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