Mundell Fleming

CFA Level II Economics
#1

From V2: pg 534

Expansionary Fiscal Policy: If capital flows are highly sensitive to interest rate differentials, then the domestic currency will tend to appreciate substantially.

Fiscal policy is determined by gov’t spending and taxes. Can anyone explain to me how that determines interest rates, which then determines currency rates?

#2

Expansionary fiscal policy = govt. running deficits = borrowing money = increase in demand for loanable funds in the economy = higher interest rates.