Which of the following is a true statement describing expansionary fiscal policy's impact in open and closed economies?
A)Expansionary fiscal policy crowds out only investment spending and purchases of consumer durables in an open economy.
B)Expansionary fiscal policy crowds out investment spending, purchases of consumer durables and net exports in an open economy.
C)Expansionary fiscal policy crowds out investment spending, purchases of consumer durables and net exports in a closed economy.
D)Expansionary fiscal policy does not crowd out investment spending and purchases of consumer durables in an open economy.

Question

Quizplus · Accepted Answer

In an open economy, expansionary fiscal policy will increase demand for goods and services, leading to an increase in imports which in turn leads to a decrease in net exports. This is called crowding out of net exports. Additionally, the increased demand may lead to higher interest rates, which can discourage investment and purchases of consumer durables. Therefore, expansionary fiscal policy crowds out investment spending, purchases of consumer durables, and net exports in an open economy. Crowding out does not occur in a closed economy where there are no imports or exports.

Which of the Following Is a True Statement Describing Expansionary