Question

In: Economics

How does expansionary fiscal policy affect r, CF, e, NX, and Y in the short-run, under...

How does expansionary fiscal policy affect r, CF, e, NX, and Y in the short-run, under floating exchange rates in a large open economy? (Ch. 13)

Solutions

Expert Solution

If Expansionary fiscal policy is implemented under floating exchange rate in the large open economy, means increase in the government spending and tax cuts. it affects on r, cf, e, NX, Y in short run, which is explained as follows:-

If expansionary fiscal policy implemented in the economy means decrease in savings leads to decrease in investment and decrease in investment leads to decrease in return(r).

With the implementation of the expansionary fiscal policy, government spending increases which leads to increase in the expenses(e).

With the implementation of the expansionary fiscal policy , net exports decreases which decreases aggregate output(nx).

With the implementation of the expansionary fiscal policy, tax decreases which leads to decrease in the income of the government(y).

With the implementation of expansionary fiscal policy, cash flow increases in the economy because decrtease in the investment(cf).


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