How is the impact of expansionary fiscal policy different in an open economy than in a closed economy?
What will be an ideal response?
In a closed economy, expansionary fiscal policy raises aggregate demand through higher government spending. If the higher spending level is financed by government borrowing, this increase in the deficit raises interest rates and crowds out private consumption and investment. However, the direct effect of higher government spending is strong enough to result in an increase in aggregate demand.
In an open economy, however, the higher interest rate that results from an increase in the deficit also raises exchange rates, which will reduce net exports. Since net exports are also a component of aggregate demand, the impact of expansionary fiscal policy in increasing aggregate demand is more limited in an open economy than in a closed economy.
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If people expect the dollar to depreciate, then the
A) demand for dollars will decrease, the supply of dollars will increase, and the exchange rate will fall. B) demand for dollars will decrease, the supply of dollars will not change, and the exchange rate will fall. C) supply of dollars will increase, the demand for dollars will not change, and the exchange rate will fall. D) demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise.
The relationship between GDP and the money supply has gotten stronger since the 1980s
Indicate whether the statement is true or false