APFIVE Fiscal Policy and Currency Appreciation
A country is choosing to pursue an expansionary fiscal policy that eventually leads to an appreciation of its currency. What economic activity is most directly responsible for the currency’s appreciation in this scenario?
A
An increase in domestic interest rates driven by higher government spending, which attracts foreign capital inflows.
B
A simultaneous decrease in domestic aggregate demand that lowers overall price levels and reduces currency value.
C
A significant depreciation of the domestic currency that boosts export demand and therefore appreciates the currency.
D
A reduction in net exports due to lower import prices, which has little to do with domestic interest rate movements.
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