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countries have flexible exchange rates and highly mobile capital

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A.) What are the effects of one country pursuing expansionary fiscal policy and tight monetary policy?

B.) What are the effects of the other country pursuing a tight fiscal policy and an expansionary monetary policy?

C.) What would happen to the interest rates and exchange rate between the two countries?

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Countries that have flexible exchange rates and highly mobile capital are explored.

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It is given that the countries have flexible exchange rates and highly mobile capital. For the sake of convenience lets call them country 1 and country 2.

A. When country 1 pursues an expansionary fiscal policy it will generally involve lower taxes, or higher government spending, or both. This will mean aggregate demand will rise in country 1. Along with an expansionary fiscal policy the country is also following a tight ...

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