1. Why is fiscal policy less effective in an open economy than in a closed econo
ID: 1122768 • Letter: 1
Question
1. Why is fiscal policy less effective in an open economy than in a closed economy? a. Expansionary fiscal policy raises demand forimports, which reduces aggregate demand. b. Expansionary fiscal policy raises interest rates, whichraises the value ofthe curTrency, andreduces demand c. Expansionary fiscal policy raises the value of the curency, which reduces demand for exports d. Expansionary fiscal policy has all the above effects. 2. In an open economy, an increase in (G-T) will a decrease (X-IM. b. increase (X-IMD c.leave (X-IM) unchanged. d. have an unpredictable effect on (X-IM) 3. Suppose that the Fed deaides to increase the growth rate of the money supply in the United States. Whati to happen to the U.S. trade deficit and to GDP? a. The trade deficit will fall, GDP will fall. b. The trade deficit will rise; GDP will rise c. The trade deficit will fall; GDP will rise d. The trade deficit will rise; GDP will fall 4. What are the results of a contractionary monetarypolicy in an open economy with floating exchange rates and intemationally mobile capital? of a contractionary monetary policy in an open economy with floating exchange rates and a. The dollar appreciates, which leads to an increase in exports and a decrease in imports. The country therefore b. The dollar appreciates, which attracts foreign capital. Also, imports rise and exports dedine. The country winds up with a deficit in capital and a surplus in its balance of trade therefore winds up with a surplus in capital and an increase in its trade deficit. dollar depreciates, which attracts foreign capital. Also, exports rise and imports decline. The country therefore winds up with a deficit in capital and a surplus in its balance oftrade d. The dollar depredates, which leads to a larger real GDP and a larger trade surplus.Explanation / Answer
1) d is the right answer. fiscal policy expansion in open economy results in reduction of demand owing to increase in rates and trade deficit.
2) a is the right answer. It will lead to increase in imports and so X-IM will go low.
3) b is the right answer. When the money supply is increased, consumption will increase which in turn leads to increase in GDP and cause the imports to go high due to low value of local currency. This results in trade deficit go high.
4) a is the right answer. When the money supply is reduced, it will result in the exchange value of local currency to go high and it boosts the exports.
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