Under a fixed exchange rate and perfect capital mobility, which policy is completely ineffective in influencing aggregate demand?

💡 Explanation:

According to the Mundell-Fleming model, with a fixed exchange rate and perfect capital mobility, monetary policy is completely ineffective. An expansionary monetary policy (lowering interest rates) would cause massive capital outflow. To maintain the fixed exchange rate, the central bank must intervene by selling foreign reserves (and buying domestic currency), which perfectly offsets the initial increase in the money supply, thus negating any impact on domestic interest rates or aggregate demand. Fiscal policy is highly effective under these conditions.