Given a system of floating exchange rates, other things equal an expansionary fiscal policy by the United States will cause
A) the dollar to appreciate and will decrease U.S. net exports.
B) the dollar to appreciate and will increase U.S. net exports.
C) the dollar to depreciate and will increase U.S. net exports.
D) the dollar to depreciate and will decrease U.S. net exports.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy in the United States typically leads to higher interest rates as the government borrows more. Higher interest rates attract foreign capital, leading to an appreciation of the dollar. This makes U.S. goods more expensive abroad and foreign goods cheaper in the United States, thus decreasing U.S. net exports.

Given a System of Floating Exchange Rates, Other Things Equal