In the long run, expansionary fiscal policy

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves increasing government spending and/or decreasing taxes, can lead to a higher trade deficit as domestic consumption and investment increase, potentially strengthening the demand for foreign goods (increasing imports). It can also lead to a depreciation of the exchange rate due to higher interest rates attracting foreign capital, although this effect can vary depending on the broader economic context. Additionally, by increasing demand for funds, it can raise interest rates, crowding out private investment in interest-sensitive sectors like housing and capital goods.

In the Long Run, Expansionary Fiscal Policy