Question

Using the Mundell-Fleming model, suppose the marginal propensity to consume increases. If the Fed does nothing, the exchange rate will __________. If the Fed wishes to keep the exchange rate unchanged, they must __________ the money supply. g

Answer 1

Increase

buy the local currency back from the central bank to fix the exchange rate

Step-by-step explanation:

If Fed does nothing then the exchange rate will increase. In this case, if nothing is done against the money contraction, then there is upward pressure on the exchange rate.

In case if Fed wants to keep the exchange rate unchanged, they had to buy the local currency back from the central bank to fix the exchange rate