The effects of expansionary fiscal and monetary policies differ under a flexible exchange rate system because they have different effects on

Question

Quizplus · Accepted Answer

Expansionary fiscal policy (increasing government spending or decreasing taxes) and expansionary monetary policy (increasing the money supply) both aim to increase aggregate demand but have different effects on interest rates. Expansionary fiscal policy tends to increase interest rates by increasing demand for loanable funds, while expansionary monetary policy tends to decrease interest rates by increasing the supply of money.

The Effects of Expansionary Fiscal and Monetary Policies Differ Under