Question
In: Economics
Which of the following statements is correct? Select one: a. An increase in government spending in...
Which of the following statements is correct?
Select one:
a. An increase in government spending in a small open economy causes currency depreciation
b. An increase in domestic taxes in a small open economy causes a decrease in the real interest rate
c. An increase in taxes in a small open economy causes currency depreciation
d. An increase in domestic physical capital in a small open economy causes an increase in the real interest rate.
Solutions
Expert Solution
Option A is correct.
Explanation: An increase in Government spending in small economy causes currency depreciation. When Government spending increases i.e.by using fiscal and monetary measures, income of the people of the domestic country increases and demand for imported goods and services also increases which results into increase in value of foreign currency and depreciation in the value of domestic currency.
Other options b,c and d are incorrect as they are giving incorrect view about small economy, domestic currency etc.
Rahul Sunny answered 2 years agoRelated Solutions
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