If international capital flows are not very responsive to interest rates, the initial impact of expansionary fiscal policy will:
A)result in a significant deterioration in the financial account.
B)result in a deficit in the overall balance of payments.
C)be totally ineffective.
D)lead to a current account surplus.

Question

Quizplus · Accepted Answer

When international capital flows are not very responsive to interest rates, an expansionary fiscal policy (which typically involves increased government spending or decreased taxation) can lead to higher domestic interest rates. However, if capital does not flow in significantly in response to these higher rates, the country may not finance its increased spending or reduced taxes through capital inflows. Instead, it might have to use its foreign reserves or borrow more from abroad, potentially leading to a deficit in the overall balance of payments as the country spends more on imports without a corresponding increase in exports or financial inflows to balance it.

If International Capital Flows Are Not Very Responsive to Interest