Which of the following best explains why a fiscal expansion tends to decrease net exports?
OA. An expansionary fiscal policy leads to an increase in output, an increase in the interest rate and an appreciation of the domestic currency. The appreciation causes imports to increase whereas a higher level of output increases exports. Therefore, net exports decrease.
OB. Net exports, NX NX(Y, Y, E), depend negatively on domestic output, Y, and positively on the exchange rate, E. An expansionary fiscal policy leads to an increase in output but has no impact on the exchange rate. Therefore, net exports decrease.
O C. An expansionary fiscal policy leads to an increase in output, an increase in the interest rate and a
O D. Net exports, NX NX(Y, Y, E), depend positively on domestic output, Y, and negatively on the exchange rate, E. An expansionary fiscal policy leads to an increase in output and an appreciation of the domestic currency. Therefore, net exports decrease.
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