Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.
A) does not change; increases
B) increases; increases
C) increases; decreases
D) decreases; increases

Question

Quizplus · Accepted Answer

Expansionary fiscal policy in a large open economy increases the real interest rate due to higher demand for funds and increases the real exchange rate as the currency appreciates because of higher interest rates attracting foreign capital.

Expansionary Fiscal Policy in a Large Open Economy ______ the Real