What are the effects of an expansionary fiscal policy on interest rates and output in an open economy with floating exchange rates?
What will be an ideal response?
With an expansionary fiscal policy in an open economy with floating exchange rates, the IS curve shifts to the right. This puts upward pressure on inflation, and the Fed responds by increasing the real interest rate. The higher real interest rate makes investment more attractive in the United States, so net capital outflows decrease. The dollar appreciates in value, and net exports and output decrease.
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In a certain economy, toys and greeting cards are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more toys and more greeting cards, relative to the quantities of those goods that are being produced now?
a. The economy experiences economic growth. b. There is a technological advance in the toy industry, but the greeting card industry experiences no such advance. c. There is a technological advance in the greeting card industry, but the toy industry experiences no such advance. d. All of the above are correct.
Total surplus in a market will increase when the government
a. imposes a tax on that market. b. imposes a binding price floor on that market. c. removes a binding price ceiling from that market. d. None of the above is correct.