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. Effective only in the long run
D. Ineffective in influencing output
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.
Explanation:
Modern New Keynesian DSGE models used for policy analysis feature optimising households and firms, rational expectations, and some form of nominal rigidity (sticky prices or wages).
Explanation:
An outward shift of the PPF indicates economic growth, which can result from an increase in the quantity or quality of resources or from technological progress.
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