Is fiscal policy more or less effective in manipulating aggregate demand in an open economy?
What will be an ideal response?
Expansionary fiscal policy (as from tax cuts or increases in government spending) will increase aggregate demand. However, expansionary fiscal policy can result in higher interest rates if government or private saving falls as a result of expansionary fiscal policy. The higher interest rates reduce not only consumption and investment, but they also reduce net exports. That is, the crowding out effect may be much larger than in the case of a closed economy. Because the impact of expansionary fiscal policy has a negative impact on net exports that does not exist in a closed economy, fiscal policy has a smaller impact on aggregate demand in an open economy than in a closed economy.
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Even when there are only a few firms in a market, the market can still be competitive as long as barriers to entry are low. Markets of this type are called
a. monopolistic markets. b. price-taker markets. c. contestable markets. d. convertible markets.
If the demand for an agricultural product is inelastic, a bumper crop will:
A. raise price and decrease total revenues. B. raise price and increase total revenues. C. lower price and decrease total revenues. D. lower price and increase total revenues.