International capital flows tend to reduce the impact of fiscal policy.

Question

Quizplus · Accepted Answer

International capital flows can affect a country's exchange rate, interest rates, and inflation levels, which can impact the effectiveness of fiscal policy in achieving economic goals. For example, increases in government spending may lead to higher inflation, which could cause the country's currency to depreciate, making exports more competitive but also increasing the cost of imports. These changes can lead to changes in capital flows and limit the effectiveness of fiscal policy.

International Capital Flows Tend to Reduce the Impact of Fiscal