Question: Answer the following questions and explain your reasoning. (9 points) (T/F) A transitory fiscal expansion with fixed exchange rates raises the stock of foreign exchange

Answer the following questions and explain your reasoning. (9 points)

  1. (T/F) A transitory fiscal expansion with fixed exchange rates raises the stock of foreign exchange reserves of the central bank. True or false, and why?
  2. (T/F) Permanent increases in the money supply are more effective in raising the level of income under a flexible exchange rate system than under a fixed exchange rate system. True or false, and why?
  3. Suppose an economy is currently at full employment and that the nominal exchange rate is fixed. Then the monetary authorities revalue (appreciate) the domestic currency. What are the effects on economic activity and prices?

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