Suppose Malaysian authorities implemented economic policies designed to insulate the nation's monetary policy from external volatility. The

Question:

Suppose Malaysian authorities implemented economic policies designed to insulate the nation's monetary policy from external volatility. The measures included pegging the ringgit to the U.S. dollar, imposing selected and capital controls, and pursuing expansionary fiscal policies. Suppose the controls caused Malaysia to face low- mobility international capital markets.
a. Using the Three-Sector Model, explain the effect Malaysia's expansionary fiscal policy (assume it was an increase in government spending) should have on the Malaysian economy.
b. Explain whether the government's fiscal policy would be more effective at increasing GDP if Malaysia allowed the ringgit to float against the dollar.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...