In an Open Economy with Fixed Exchange Rates, Contractionary Fiscal

Multiple Choice

In an open economy with fixed exchange rates, contractionary fiscal policy causes:

A) interest rates to rise and an inflow of foreign capital causing the government to intervene and buy foreign currency.
B) interest rates to fall and an outflow of foreign capital causing the government to intervene and sell foreign currency.
C) interest rates to rise and an outflow of foreign capital causing the government to intervene and sell foreign currency.
D) interest rates to fall and an outflow of foreign capital causing the government to intervene and buy foreign currency.
E) interest rates do not change and an inflow of foreign capital causes the government to intervene and buy foreign currency.