In an open economy, expansionary fiscal policy may lead to a currency appreciation, thereby reducing net exports.

Question

Quizplus · Accepted Answer

When a country implements expansionary fiscal policy, it typically involves increasing government spending or reducing taxes. This can lead to an increase in aggregate demand and output, which may increase demand for the country's currency. Increased demand for the currency leads to an appreciation of the currency's value, which makes exports more expensive and reduces the competitiveness of the country's exports in the global market. This can ultimately reduce net exports, which is the difference between exports and imports.

In an Open Economy, Expansionary Fiscal Policy May Lead to a Currency