In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?
A)It will cause the dollar to depreciate.
B)It will cause the dollar to appreciate.
C)It will cause net exports to increase.
D)It will cause a lasting effect on aggregate demand.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy increases government spending or decreases taxes, leading to higher interest rates. This attracts foreign capital, causing the domestic currency to appreciate.

In a Small Open Economy with a Flexible Exchange Rate