Expansionary fiscal policy raises interest rates via increased borrowing

Steps:

• Expansionary fiscal policy involves higher government spending or tax cuts to stimulate the economy and reduce unemployment.
• This increases the budget deficit as spending exceeds revenue.
• To finance the deficit, the government borrows more from commercial banks, raising its borrowing requirement.
• Greater demand for loanable funds from banks pushes up interest rates.

Why D is correct:

• Increased government borrowing competes for funds in the loanable funds market, raising interest rates per the crowding-out effect.

Why the others are wrong:

• A: Expansionary policy widens the budget deficit by boosting spending relative to revenue.
• B: More borrowing directly increases the national debt.
• C: Fiscal policy affects domestic borrowing, not directly the current account balance of payments.

Final answer: D