Question

If the Canadian government implements an expansionary fiscal policy, what will most likely happen to the real interest rate in Canada and the international value of the Canadian dollar in the short run?

Interest Rate   Value of Dollar

increase             appreciate

increase             depreciate

decrease            appreciate

decrease             depreciate

Answer 1

Aim of expansionary policy is to increase the money supply in economy to boost growth of economu

There are 2 types of expansionary policies:

Monetary expansionary policy: increase the money supply in economy by lowering the interest rates

Fiscal expansionary policy: increasing the money supply in economy by increasing government spending or by lowering tax rates

Expansionary fiscal policy is policy in which government basically increases the money supply in economy by increasing government spending or cutting taxes rates or both in order to boost the growth of economy

Generally Expansionary fiscal policy leads to currency appreciation because of increase in growth rate of economy

Expansionary fiscal policy leads to increase in borrowing by government (due to increased government expenses and lower government revenue). Increases demand for money by government leads to increase in interest rate (Real interest rates).

Therefore option 1 is correct

Increase in real interest rates and

appreciation of currency