According to the foreign-trade effect, an expansionary fiscal policy that boosts interest rates will cause net exports to decrease, partially offsetting the expansionary fiscal policy.

Question

Quizplus · Accepted Answer

The foreign-trade effect suggests that higher interest rates resulting from expansionary fiscal policy will appreciate the domestic currency, making exports more expensive and imports cheaper, thus decreasing net exports and offsetting some of the expansionary policy's effects.

According to the Foreign-Trade Effect, an Expansionary Fiscal Policy That