(Solution) - Suppose Malaysian authorities implemented economic policies designed to insulate the -(2025 Original AI-Free Solution)

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Suppose Malaysian authorities implemented economic policies designed to insulate the nation's monetary policy from external volatility. The measures included pegging the ringgit to the U.S. dollar, imposing selected exchange rate and capital controls, and pursuing expansionary fiscal policies. Suppose the controls caused Malaysia to face low- mobility international capital markets.
a. Using the Three-Sector Model, explain the effect Malaysia's expansionary fiscal policy (assume it was an increase in government spending) should have on the Malaysian economy.
b. Explain whether the government's fiscal policy would be more effective at increasing GDP if Malaysia allowed the ringgit to float against the dollar.