In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?
A) the dollar to depreciate
B) the dollar to appreciate
C) net exports to increase
D) a lasting effect on aggregate demand

Question

Quizplus · Accepted Answer

An expansionary fiscal policy in a small open economy with a flexible exchange rate typically leads to an appreciation of the domestic currency. This is because higher government spending increases domestic interest rates, attracting foreign capital and causing the currency to appreciate.

In a Small Open Economy with a Flexible Exchange Rate