Suppose that net exports were to become more sensitive to changes in the interest rate. You would expect to see
A) both fiscal and monetary policy become more effective.
B) both fiscal and monetary policy become less effective.
C) monetary policy become more effective and fiscal policy become less effective.
D) fiscal policy become more effective and monetary policy become less effective.
E) fiscal policy become more effective without any change in the effectiveness of monetary policy.

Question

Quizplus · Accepted Answer

When net exports become more sensitive to changes in the interest rate, monetary policy, which directly influences interest rates, becomes more effective in affecting the economy. Conversely, fiscal policy, which influences the economy through government spending and taxation, becomes less effective relative to monetary policy because the impact of fiscal policy on interest rates and thus on net exports is indirect.

Suppose That Net Exports Were to Become More Sensitive to Changes