Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.

Expansionary fiscal policy typically involves increased government spending or tax cuts aimed at stimulating economic activity. In a large open economy, such policies generally lead to an increase in aggregate demand. As demand within the economy rises, this can put upward pressure on the real interest rate.

When the real interest rate increases, it tends to attract foreign investment as investors seek higher returns. This influx of investment can lead to an appreciation of the country's currency, effectively increasing the real exchange rate (which represents the value of the currency relative to others adjusted for price levels). Therefore, both the real interest rate and the real exchange rate are likely to increase as a result of expansionary fiscal policy.

This understanding aligns with the dynamics of capital mobility in large open economies, where the interconnectedness with global markets plays a significant role in how monetary and fiscal policies impact exchange rates and interest rates.