Question

Expansionary fiscal policy __ output and __ the real interest rate in the short run​ (using a Keynesian​ model), both of which lead to a __ in net exports.

Answer 1

Expansionary fiscal policy increases output and reduces the real interest rate, leading to a decrease in net exports in the short run using a Keynesian model.

Step-by-step explanation:

Expansionary fiscal policy increases output and reduces the real interest rate in the short run​, utilizing a Keynesian model. Both of these outcomes lead to a decrease in net exports.

The reason for this decrease in net exports is that as domestic interest rates fall, the relative attractiveness of domestic assets declines, thereby causing the domestic currency to depreciate.

Moreover, expansionary fiscal policy, by boosting domestic demand, raises domestic income and consumption, which tends to increase imports. The combination of more imports and less attractive domestic investments to foreigners puts downward pressure on the currency's value, making exports more expensive and imports cheaper, resulting in a decrease in net exports.