Question

Together with large current account deficits, the Argentine government began running increasingly large budget deficits. How might this be structurally related to the choice of a fixed exchange rate regime?

O deficits were needed to finance capital outflow at the established rate

O with no monetary policy, fiscal policy became the only macroeconomic policy tool to fight recessions

O fiscal profligacy had nothing to do with the exchange rate, Argentina's political leadership was as irresponsible as its monetary leadership had been

O the debt allowed Argentina's government to import arms for an attempt at another war with Brittain

Answer 1

When a country has a fixed exchange rate regime, the government may run large budget deficits to finance capital outflow and maintain the established rate. In the absence of a monetary policy, fiscal policy becomes the only tool to fight recessions. However, this reliance on deficits can lead to economic instability. Considering as option number a ,b,c and d option number b is correct.

Step-by-step explanation:

When a country has a fixed exchange rate regime, it means that the value of its currency is fixed in relation to another currency, usually a major international currency like the US dollar. In the case of Argentina, the government's choice of a fixed exchange rate regime meant that it had to maintain a certain exchange rate with the US dollar. This put pressure on the government's budget because it needed to ensure a consistent supply of dollars to maintain the fixed exchange rate.

One way the government could finance the outflow of dollars at the established rate was by running budget deficits. The government could borrow money to finance its spending, which would increase its budget deficit. However, this was only a short-term solution and could lead to further economic problems in the long run.

Without a monetary policy, fiscal policy became the only tool the government had to manage the economy and respond to recessions. This meant that the government had to rely on increasing deficits to stimulate the economy during periods of recession. However, this approach was unsustainable and led to a cycle of increasing deficits and economic instability.