Answer: highly sensitive to interest rate differentials.

## Explanation Expansionary fiscal policy typically involves increased government spending or tax cuts, which can: - Increase domestic demand - Potentially lead to higher interest rates due to increased borrowing - Attract foreign capital seeking higher returns When capital flows are **highly sensitive to interest rate differentials** (Option C), the higher domestic interest rates resulting from expansionary fiscal policy will attract significant foreign capital inflows. This increased demand for the domestic currency causes it to **appreciate**. In contrast: - **Immobile capital** (Option A) would not respond to interest rate changes - **Insensitive capital flows** (Option B) would not significantly respond to interest rate differentials **Correct Answer: C** - Highly sensitive to interest rate differentials.

Author: LeetQuiz Editorial Team