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NEW QUESTION: 1
Crowding-out effect implies that an expansionary fiscal policy will have following result(s):
I). higher real interest rate.
II). higher nominal interest rate.
III). higher dollar value in foreign exchange market.
IV). increased net exports.
A. II and IV.
B. I and III.
C. II and III.
Real interest rate will be higher since the government borrowing will increase the demand for loanable funds. Nominal interest rate will be determined by both real rate AND inflation rate, and it's uncertain that it will be higher. The higher real interest rate will attract financial capital from abroad and lead to appreciation of the dollar, which in turn will reduce the net export.