Under a fixed exchange rate system and a neutral monetary policy, an expansionary fiscal policy will be reinforced by an open economy because of the resultant capital _____ U.S. capital markets, which _____ interest rates.
A) outflow from; reduces
B) outflow from; increases
C) inflow to; reduces
D) inflow to; increases

Question

Quizplus · Accepted Answer

An expansionary fiscal policy typically leads to higher interest rates, attracting foreign capital. This inflow of capital to the U.S. capital markets reduces interest rates less than they would increase without such inflows, hence reinforcing the fiscal expansion.

Under a Fixed Exchange Rate System and a Neutral Monetary