The Ideal Currency Regime and Its Properties

Which of the following statements is _least likely_ a viable explanation for why expansionary monetary policy is relatively ineffective in stimulating a domestic economy for a country with a fixed exchange rate regime?

Correct. Although inflationary pressures and export prices may rise, the resultant contractionary effect on the economy would likely be delayed; further, any such effects would not be significant unless the country has a large foreign trade sector.

Incorrect. Capital outflows and the shrinking monetary base explain why interest rates would be pushed higher, counteracting the expansionary policy.

Incorrect. Given the fixed exchange rate, investors will flee the domestic market and higher interest rates will be required to continue to attract needed capital.

Growth in the money supply will lead to increased inflationary pressures and higher export prices, creating contractionary forces as the country's exports shrink

Since lower interest rates reduce the demand for its currency, the country experiences an exodus of foreign capital that exerts offsetting pressure on interest rates

The lower interest rate environment causes investors to seek higher returns elsewhere, shrinking the availability of domestic capital needed for investment purposes