Spending Multiplier and Foreign Exchange Effects

Question

Suppose consumers have a marginal propensity to consume (MPC) of 0.75. What is the spending multiplier, and how might an increase in government spending by $100 million, via its effect on interest rates, indirectly affect the foreign exchange market?

Accepted Answer

The multiplier is 4, and the increase in spending raises interest rates, attracting foreign capital which shifts the demand for dollars right, appreciating the currency.

Answer

The multiplier is 4, and the increase in spending causes a leftward shift in the demand curve, depreciating the currency.

Answer

The multiplier is 3, and the increase in spending raises interest rates, but leads to a rightward shift in the supply curve, depreciating the currency.

Answer

The multiplier is 3, and the increase in spending leads to a leftward shift in the supply curve, depreciating the currency.