For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?
A)an increase in the domestic interest rate
B)an increase in the exchange rate
C)a reduction in net exports
D)all of the above
E) only A and C

Question

Quizplus · Accepted Answer

This policy mix of increased government spending and monetary contraction typically leads to higher domestic interest rates. Higher interest rates attract foreign capital, appreciating the domestic currency (increase in the exchange rate), which in turn reduces net exports as domestic goods become more expensive for foreigners. Thus, all of the effects listed (A, B, and C) are expected outcomes, making D the correct answer.

For This Question,assume That There Is a Simultaneous Increase in Government