International flows of financial capital in response to interest rate changes in Canada:
A)weaken domestic fiscal policy through an offsetting net export effect.
B)strengthen domestic fiscal policy through a supporting net export effect.
C)strengthen domestic fiscal policy through an offsetting net export effect.
D)do none of the above.

Question

Quizplus · Accepted Answer

When interest rates in Canada increase, there is typically an increase in the flow of financial capital into Canada from other countries seeking higher returns on their investments. This results in an appreciation of the Canadian dollar, making Canadian exports more expensive and less competitive on the global market. As a result, the net export effect is offsetting, weakening domestic fiscal policy.

International Flows of Financial Capital in Response to Interest Rate