Expansionary Fiscal Policy & Real Interest Rates

[stons]

Can anybody explain why expansionary fiscal policy increases real interest rates leading to currency appreciation?

 

[MissCleo]

Expansionary fiscal policy is essentially what the democrats are pretty much known for. Not to get too political but essentially they want to decrease taxes, and increase spending. Well how well they get this money you ask? They borrow, and by borrowing they essentially run up the interest rates. Look at Greece who has borrowed more money than god, and their interest rates show it. This increase in interest rates will cause outside capital to come in and cause the currency to appreciate.
It’s kind of counterintutive since the exports will be going down, while imports will be going up, but the interest rate appreciation trumps it in this instance. Someone correct me if I’m wrong please, Econ was never my best subject.

 

[rsheth1109]

When there is an expansionary fiscal policy the government either lowers taxes or increases their spending. The theoretical consequence is increased deficits. Increased deficits will lead to more borrowing which will lead to higher real interest rates. Higher real interest rates will increase the DEMAND for the domestic currency thus leading to currency appreciation.