Suppose that in an open economy the government engages in extensive spending financed through bond sales that raise interest rates in the economy. Is it possible for net exports to fall and offset the government's AD stimulus to some extent?
B. If interest rates are high in the economy, there will be a net inflow of funds from other countries. The increased demand for the local currency will cause it to appreciate. This will reduce exports and increase imports, and thus net exports (X-M) will fall and negatively impact AD.

Question

Quizplus · Accepted Answer

The Answer of Suppose that in an open economy the government engages in extensive spending financed through bond sales that raise interest rates in the economy. Is it possible for net exports to fall and offset the government's AD stimulus to some extent?
B. If interest rates are high in the economy, there will be a net inflow of funds from other countries. The increased demand for the local currency will cause it to appreciate. This will reduce exports and increase imports, and thus net exports (X-M) will fall and negatively impact AD.

Suppose That in an Open Economy the Government Engages in Extensive