All else being equal in a classical model,a temporary decrease in government expenditures in the United States would cause the Canadian real interest rate to ________ and the Canadian price level to ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question

Quizplus · Accepted Answer

A temporary decrease in U.S. government expenditures would likely lead to lower demand for goods and services, reducing interest rates in the U.S. This could lead to capital outflows to Canada, increasing the supply of loanable funds in Canada and causing Canadian real interest rates to fall. The reduced demand in the U.S. could also lead to lower demand for Canadian exports, reducing the Canadian price level.

All Else Being Equal in a Classical Model,a Temporary Decrease