Expansionary fiscal policy in an open economy
A)leads to a balance of trade surplus.
B)decreases America's capital account surplus and the current account deficit by the same amount.
C)increases both America's capital account surplus and current account deficit by equal amounts.
D)increases America's capital account surplus more than it increases the current account deficit.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy leads to an increase in domestic demand, which in turn increases imports. This increase in imports leads to an increase in the current account deficit. However, the increase in domestic demand also makes the economy more attractive to foreign investors, leading to an increase in capital inflows and an increase in the capital account surplus. Therefore, expansionary fiscal policy increases both America's capital account surplus and current account deficit by equal amounts.

Expansionary Fiscal Policy in an Open Economy