Which of the following would lower the amount of investment crowded out by an increase in government purchases?
A)A less interest-rate-sensitive exchange rate
B)Imports becoming less exchange-rate sensitive
C)A more interest-rate-sensitive exchange rate
D)Government purchases becoming less interest-rate sensitive
E)Exports becoming less exchange-rate sensitive

Question

Quizplus · Accepted Answer

A more interest-rate-sensitive exchange rate would lower the amount of investment crowded out by an increase in government purchases because it would lead to a larger depreciation of the domestic currency when interest rates rise. This depreciation would boost net exports, offsetting some of the crowding-out effect by stimulating economic activity in other sectors.

Which of the Following Would Lower the Amount of Investment