Consider easy (expansionary) fiscal policy done in a large open economy. As a result, world real...
Consider easy (expansionary) fiscal policy done in a large open economy.
As a result, world real interest rates will _______ and the real exchange rate will ________.
a) rise; rise
b) fall; fall
c) rise; fall
d) fall; rise
Homework Answers
Answer
Option a
The expansionary fiscal policy increases government spending or decreases taxes or both, it increases consumption and investment spendings which increases aggregate demand and increases price level and real output in the economy.
The increased price level increases the transaction demand for money and increases the real interest rate in the country, as well as the world as the country is large so, it can influence the world market of investment.
The increase in the interest rate in the country increases the demand for investment from other countries investors which increases the demand for the currency of that currency and increases the exchange rate.
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