Which cause-and-effect chain would best explain the reason for a decline in net exports? An expansionary fiscal policy:
A)increases domestic interest rates and leads to an appreciation of the dollar that reduces net exports.
B)decreases interest rates and leads to a depreciation of the dollar that reduces net exports.
C)increases domestic interest rates and leads to a depreciation of the dollar that reduces net exports.
D)decreases interest rates and leads to an appreciation of the dollar that reduces net exports.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy involves an increase in government spending or a decrease in taxes, which leads to an increase in aggregate demand in the economy. This increase in demand leads to an increase in domestic interest rates, which attracts foreign investors to invest in the domestic economy. This increases the demand for domestic currency, which in turn leads to an appreciation of the dollar. As the dollar appreciates, exports become more expensive for foreign buyers and imports become cheaper for domestic consumers, leading to a reduction in net exports.

Which Cause-And-Effect Chain Would Best Explain the Reason for a Decline