Crowding out,following an increase in government spending,results from (the exchange rate is the foreign exchange price of the domestic currency)
A)higher interest rates and a lower exchange rate.
B)higher interest rates and a higher exchange rate.
C)lower interest rates and a lower exchange rate.
D)lower interest rates and a higher exchange rate.

Question

Quizplus · Accepted Answer

Crowding out occurs when increased government spending leads to higher interest rates, which in turn appreciates the domestic currency (leading to a higher exchange rate). Higher interest rates attract foreign capital, increasing the demand for the domestic currency and thus its value.

Crowding Out,following an Increase in Government Spending,results from (The Exchange