Expansionary fiscal policy can lead to a decline in net exports because:
A)it increases interest rates, increasing the exchange value of the dollar and decreasing net exports.
B)it increases interest rates, decreasing the exchange value of the dollar and decreasing net exports.
C)it decreases interest rates, increasing the exchange value of the dollar and decreasing net exports.
D)it decreases interest rates, decreasing the exchange value of the dollar and decreasing net exports.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy involves government spending and/or tax cuts which increase demand in the economy, leading to increased production and employment levels. This increased demand can also lead to higher interest rates, which can attract foreign investment and increase the exchange value of the country's currency (in this case, the dollar). A higher exchange value of the dollar makes exports more expensive for foreign buyers, leading to a decrease in net exports. Therefore, choice A is the best answer.

Expansionary Fiscal Policy Can Lead to a Decline in Net