An expansionary fiscal policy causes which of the following effects?
I. The domestic currency depreciates.
II. Exports decrease.
III. Real interest rates increase.
IV. Capital flows in from abroad.
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A. B. C. D.B
When the government adopts an expansionary fiscal policy, the aggregate demand increases, causing an increase in prices. Since the demand for loanable funds increases due to the governmental presence in the market, the real interest rate increases. This attracts foreign investment, raising the demand for domestic currency, which appreciates in response. The appreciation of the domestic currency makes imports cheaper and exports costlier. As a result, exports decline and imports increase over time.