Under a floating exchange rate regime with a low degree of capital mobility, if the domestic government uses an expansionary fiscal policy:
A)the domestic interest rate increases.
B)foreign capital inflows decrease domestic product.
C)the financial account balance deteriorates.
D)the official settlements balance tends to go into surplus.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy would result in an increase in domestic demand, leading to an increase in the domestic interest rate due to the increased demand for credit. This would make investing in the domestic economy more attractive to foreign investors, therefore increasing capital inflows rather than decreasing them. The financial account balance would improve as a result of the increased foreign investment, but the official settlements balance would depend on the net effect of the changes in the current and capital accounts.

Under a Floating Exchange Rate Regime with a Low Degree