Suppose that counter-cyclical fiscal policy pushed up interest rates and the economy had a flexible exchange rate.Which of the following would be true?
A)The exchange rate would fall,and exports would rise.
B)The exchange rate would fall,and exports would fall.
C)The exchange rate would rise,and exports would rise.
D)The exchange rate would rise,and exports would fall.

Question

Quizplus · Accepted Answer

Counter-cyclical fiscal policy increases interest rates and makes the domestic currency more attractive, which leads to an appreciation of the exchange rate. As a result, exports become more expensive, and demand for them declines, causing exports to fall.

Suppose That Counter-Cyclical Fiscal Policy Pushed Up Interest Rates and the Economy