Explain why an expansionary fiscal policy is effective for a small open economy with fixed exchange rate.

Explain why an expansionary fiscal policy is not effective for a small open economy with flexible exchange rate.

Expert Solution

Rahul Sunny answered 2 years ago

3. Explain why an expansionary monetary policy is not useful for a small open economy with fixed exchange rate.

3. Explain why an expansionary monetary policy is not useful for a small open economy with fixed exchange rate.4.Explain why an expansionary monetary policy is effective for a small open economy with flexible exchange rate.

Explain how expansionary fiscal policy impacts a small open economy with a floating exchange rate; and...

Explain how expansionary fiscal policy impacts a small open economy with a floating exchange rate; and compare that to how expansionary fiscal policy works for a country with a fixed exchange rate

Initially a small open economy is in recession. The government implements expansionary fiscal policy by increasing...

Initially a small open economy is in recession. The government implements expansionary fiscal policy by increasing government spending. However, central bank worries about inflation and increase interest rate. Examine the effects of this policy combination on output, interest rate and the components of demand under flexible exchange rate regime(Hint:Useopen economyIS-LM model)

Explain the effects of fiscal policy on output and employment in an open economy with fixed...

Explain the effects of fiscal policy on output and employment in an open economy with fixed exchange rates.

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction...

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction in the interest rate that prevails in world financial markets would have on each of the following domestic variables after the economy has adjusted to a new equilibrium: (i) Real GDP (ii) Domestic interest rate (iii) Central bank’s stock of foreign exchange reserves (iv) Real exchange rate (v) Current and non-reserve financial accounts of the balance of payments

Why does a flexible exchange rate make monetary policy more effective but fiscal policy less effective?

Effective fiscal policy to correct for an expansionary gap will

24. Effective fiscal policy to correct for an expansionary gap willa. only reduce the price levelb. only reduce real GDPc. only increase the price leveld. only increase real GDPe. reduce both the price level and real GDP25. How much would government purchases have to change to increase RGDP $1,000,000,000 if MPC were 0.9?a. $100,000b. $100,000,000c. $10,000,000d. $1,000,000e. 1,000,000,000

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility...

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables: a. The stock of foreign exchange reserves. b. The money supply. c. Real GDP. d. The price level. e. The real exchange rate.

The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially...

The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially in short-run equilibrium. An outbreak of COVID-19 occurs and as a result money demand rises AND autonomous consumption falls. Suppose policy makers would like to keep fluctuations in the unemployment rate as small as possible, this implies the best policy reaction would be to: a) increase the money supply (only) b) Increase taxes (only) c) Increase the money supply, cut taxes and cut government...

Suppose a large open economy with fixed exchange rate.

Suppose a large open economy with fixed exchange rate.A. What happens to income, interest rate in response to a fiscal expansion?B. What happens to income and interest rate if the central bank expands money supply by buying bonds from the public?

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