Why is the multiplier for contractionary fiscal policy smaller in an open economy?
A)Contractionary fiscal policy reduces the deficit,which raises the interest rate,which raises the foreign exchange value of the dollar,which increases net exports.
B)Contractionary fiscal policy increases the deficit,which raises the interest rate,which reduces the foreign exchange value of the dollar,which increases net exports.
C)Contractionary fiscal policy reduces the deficit,which reduces the interest rate,which reduces the foreign exchange value of the dollar,which increases net exports.
D)Contractionary fiscal policy reduces the deficit,which reduces the interest rate,which reduces the foreign exchange value of the dollar,which decreases net exports.

Question

Quizplus · Accepted Answer

In an open economy, contractionary fiscal policy can lead to lower interest rates, which may reduce the value of the domestic currency, potentially increasing net exports. This effect can offset some of the contractionary impact, making the multiplier smaller.

Why Is the Multiplier for Contractionary Fiscal Policy Smaller in an Open