In the Mundell-Fleming model under perfect capital mobility and floating exchange rates, monetary policy is:
A. Completely neutral
B. Highly effective in influencing output
C. Ineffective in influencing output
D. Effective only in the long run
Answer: Option B
Solution (By JKSSB Mock Tests)
Under perfect capital mobility and floating exchange rates, an expansionary monetary policy lowers interest rates, causes capital outflow and currency depreciation, which boosts net exports and output, making monetary policy highly effective.
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