In an open economy with flexible exchange rates, expansionary fiscal policy is highly effective in changing real GDP.

Question

Quizplus · Accepted Answer

In an open economy with flexible exchange rates, expansionary fiscal policy can lead to an appreciation of the domestic currency, which can offset the increase in domestic demand by reducing net exports. This can diminish the effectiveness of fiscal policy in changing real GDP.

In an Open Economy with Flexible Exchange Rates, Expansionary Fiscal