An expansionary fiscal policy and a contractionary monetary policy are consistent in their effects on the exchange rate and capital flows.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy increases government spending or decreases taxes, which leads to an increase in aggregate demand. This increase in demand leads to an appreciation of the exchange rate and an inflow of capital. A contractionary monetary policy decreases the money supply, which leads to an increase in interest rates. This increase in interest rates leads to an appreciation of the exchange rate and an inflow of capital. Therefore, an expansionary fiscal policy and a contractionary monetary policy are consistent in their effects on the exchange rate and capital flows.

An Expansionary Fiscal Policy and a Contractionary Monetary Policy Are