Contractionary fiscal policy with floating exchange rates and very low capital mobility leads to currency depreciation.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy typically leads to higher interest rates, attracting foreign capital and appreciating the currency. However, with very low capital mobility, the impact on exchange rates is minimized, but the direction of the effect (if any) would more likely lean towards currency appreciation rather than depreciation, due to reduced domestic demand and potentially improved fiscal balance.

Contractionary Fiscal Policy with Floating Exchange Rates and Very Low