In a purely floating exchange rate economy, a shift toward a more expansionary fiscal policy will move the capital account toward a ________. The current account will move toward a ________.
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A. B. C. D.B
An expansionary fiscal policy serves to raise interest rates and increase capital inflow. This moves the capital account toward a surplus. Since the changes in the capital and current accounts must balance out in a purely floating exchange rate economy, the current account moves toward a deficit.