Why Is the Multiplier for Contractionary Fiscal Policy Smaller in an Open

Multiple Choice

Why is the multiplier for contractionary fiscal policy smaller in an open economy?

A) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which raises the foreign exchange value of the dollar, which increases net exports.
B) Contractionary fiscal policy increases the deficit, which raises the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports.
C) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports.
D) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which decreases net exports.
E) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which in turn increases foreign investment.