When increases in national debt cause the domestic currency to appreciate, then debt-financed fiscal spending may be less effective than is implied by the simple government spending multiplier.

Question

Quizplus · Accepted Answer

The increase in national debt can lead to an appreciation of the domestic currency, which can lead to a decrease in the effectiveness of debt-financed fiscal spending. This is because the appreciation of the currency can make exports more expensive and reduce the demand for domestic goods and services, thus offsetting the positive impact of fiscal spending. Therefore, the government spending multiplier may be less than what is usually assumed in such a situation.

When Increases in National Debt Cause the Domestic Currency to Appreciate