Problem
1. Explain why a developing country with a fixed exchange rate and foreign exchange controls in place (perfectly immobile capital) may find itself dependent on growth in exports, foreign investment, or foreign aid to attain economic growth.
2. Under what capital flow conditions is fiscal policy least effective in a fixed-rate regime? Most effective? Why?
3. Why does devaluing the domestic currency have an expansionary effect on the economy? Does this expansionary effect take place if capital is perfectly immobile? Why or why not?