According to the crowding-out effect, expansionary fiscal policy will lead to
A) higher interest rates, an appreciated dollar, and reduced net exports.
B) higher interest rates, an appreciated dollar, and increased net exports.
C) reduced interest rates, an appreciated dollar, and reduced net exports.
D) reduced interest rates, an appreciated dollar, and increased net exports.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when government spending increases, which leads to an increase in demand for loanable funds, causing interest rates to go up. When interest rates increase, domestic investors will find it more attractive to invest in the home country, leading to a stronger currency (in this case an appreciated dollar). The higher interest rates and stronger currency make exports relatively more expensive and imports cheaper, leading to a reduction in net exports. Therefore, Choice A is the best answer.

According to the Crowding-Out Effect, Expansionary Fiscal Policy Will Lead