Question

Question Set 6: Effectiveness of Monetary and Fiscal Policy in an Open Economy

Respond to and answer the following prompts and questions:

Why does monetary policy have a greater effect on aggregate demand in an open economy than in a closed economy?

Why does fiscal policy have a smaller effect on aggregate demand in an open economy than in a closed economy?

Assume our macroeconomic goals now include price level stability, full employment, economic growth, and exchange rate stability.

Assume the economy is in an inflationary gap, then design a monetary policy to close the gap. In your policy design, complete and answer the following:

Explain the effect of your policy on the macro economy in the short-run.

Illustrate your answer with a graph.

Does the United States achieve the goals of price level stability, full employment, economic growth, and exchange rate stability? Please explain.

Assume the economy is in a recessionary gap, then design a fiscal policy to close the gap. In your policy design, complete and answer the following:

Explain the effect of your policy on the macro economy in the short-run.

Illustrate your answer with a graph.

By pursuing this policy, does the United States achieve the goals of price level stability, full employment, economic growth and exchange rate stability? Please explain.

Answer 1

1)

2)