In an open economy, expansionary fiscal policy causes:
A) interest rates to rise and an inflow of foreign capital.
B) interest rates to fall and an inflow of foreign capital.
C) interest rates to rise and an outflow of foreign capital.
D) interest rates to fall and an outflow of foreign capital.
E) no change in interest rates and an inflow of foreign capital.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, such as increased government spending or tax cuts, typically leads to higher interest rates as the government competes for financing with the private sector. Higher interest rates attract foreign capital, leading to an inflow of foreign investment.

In an Open Economy, Expansionary Fiscal Policy Causes