Question

In the case of a small open economy with fixed exchange rate regime and imperfect capital mobility, which of the following is/are CORRECT?

• A. Fiscal contraction will lead to Balance of Payment deficit in the short-run if the slope of LM curve is greater than the slope of Balance of Payment curve
• B. Fiscal contraction will lead to Balance of Payment deficit in the short-run if the slope of LM curve is less than the slope of Balance of Payment curve
• C. Monetary expansion leads to Balance of Payment surplus in the short-run irrespective of the slopes of the LM curve and the Balance of Payment curve
• D. Monetary expansion leads to Balance of Payment deficit in the short-run irrespective of the slopes of the LM curve and the Balance of Payment curve

Answer 1

Answer: (A), (D)

Fiscal contraction will lead to Balance of Payment deficit in the short-run if the slope of LM curve is greater than the slope of Balance of Payment curve

Answer 2

The correct Options are A and D : Fiscal contraction will lead to Balance of Payment deficit in the short-run if the slope of LM curve is greater than the slope of Balance of Payment curve AND Monetary expansion leads to Balance of Payment deficit in the short-run irrespective of the slopes of the LM curve and the Balance of Payment curve