Because of their effect on interest rates,
A)capital flows weaken monetary policy but strengthen fiscal policy.
B)capital flows strengthen monetary policy but weaken fiscal policy.
C)the initial effects of a fiscal expansion on aggregate demand are strengthened.
D)the initial effects of a monetary contraction are weakened.

Question

Quizplus · Accepted Answer

Capital flows have a strengthening effect on monetary policy, as they can increase the demand for a country's currency, leading to an appreciation in its value and lower interest rates. However, capital flows can weaken fiscal policy as they can lead to a reduction in revenue from taxes due to an influx of foreign investments. Therefore, option B is the correct answer.

Because of Their Effect on Interest Rates