The conflicting effects of an expansionary fiscal policy are that:
A) it increases aggregate demand and improves the current account.
B) it reduces aggregate demand and the exchange rate depreciates.
C) it increases aggregate demand and the exchange rate depreciates resulting in a decrease in aggregate demand.
D) it increases aggregate demand and the exchange rate appreciates resulting in a decrease in aggregate demand.
E) it lowers aggregate demand and lowers interest rates.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, such as increased government spending or tax cuts, typically increases aggregate demand. This can lead to higher interest rates as the government competes for financing, which may appreciate the exchange rate. A stronger currency makes exports more expensive and imports cheaper, potentially decreasing net exports and thus aggregate demand.

The Conflicting Effects of an Expansionary Fiscal Policy Are That