I am currently studying for a test and the following sentence "In an open economy with high capital mobility, monetary policy is preferable to fiscal policy to stabilize the cycle", the "answer" is true, but I don´t understand why it is true.

I tried to analyze from the perspective of the Mundell-Fleming model in open economies, but I can't assume which exchange rate is present in the economy.

Thank You

  • $\begingroup$ I guess the idea is that the real economy reacts with a smaller lag to monetary than to fiscal policy. Also you should say which textbook are you using since the versions of MF for example in Mankiw and Blanchard are quite different. $\endgroup$ – Grada Gukovic Jul 31 at 10:58
  • $\begingroup$ I´m using "Macroeconomía teoría y políticas" by José de Gregorio (the textbook is focused more in Latin America) $\endgroup$ – Isidora Jul 31 at 14:07

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