Fiscal policy is neutral in the long run even in an open economy in part because
A) any increase in government spending is negated either by a reduction in net exports or by a reduction in investment.
B) higher rates of interest and higher price levels reachieve equilibrium at potential GDP with a higher real exchange rate.
C) any increase in government spending is immediately financed by influxes of foreign investment.
D) a and b.
E) all of the above.

Question

Quizplus · Accepted Answer

Fiscal policy is considered neutral in the long run, even in an open economy, because any increase in government spending can lead to a reduction in net exports or investment due to crowding out effects, and adjustments in interest rates and price levels can restore equilibrium at potential GDP, often with a higher real exchange rate.

Fiscal Policy Is Neutral in the Long Run Even in an Open