Because of their effect on interest rates:
A)capital flows weaken monetary policy but strenghen fiscal policy
B)capital flows strengthen monetary policy but weaken fiscal policy
C)the initial effects of a fiscal expansion on aggregate demand are strengthened
D)the initial effects of a monetary contraction are weakened

Question

Because of their effect on interest rates:
A)​capital flows weaken monetary policy but strenghen fiscal policy 
B)​capital flows strengthen monetary policy but weaken fiscal policy 
C)​the initial effects of a fiscal expansion on aggregate demand are strengthened 
D)​the initial effects of a monetary contraction are weakened

Quizplus · Accepted Answer

Capital flows can affect interest rates and consequently monetary and fiscal policies. When capital flows are strong, they can strengthen monetary policy by increasing the demand for domestic currency, which can reduce interest rates. However, they can also weaken fiscal policy by increasing the demand for government bonds, which can raise interest rates and government borrowing costs. Therefore, option B is correct, as capital flows strengthen monetary policy but can weaken fiscal policy.

Because of Their Effect on Interest Rates