A Note on Fiscal Policy Under Flexible Exchange Rates

Abstract The paper studies the effects of fiscal policy under flexible exchange rates. The demand for real money balances, in terms of the expenditure basket of goods, is a function of income in terms of the same basket. It turns out that fiscal expansion is expansionary, neutral, or contractionary in the money wage model depending on whether the income elasticity of the demand for money is smaller than, equal to, or greater than one. The price of domestic goods rises, is unchanged, or declines in this model depending on whether the income elasticity is smaller than, equal to, or greater than one.