If we are in a small open economy, with balanced trade, and assuming that everyone else...

If we are in a small open economy, with balanced trade, and assuming that everyone else in the world is going after an expansionary fiscal policy, G* increases

- What effect would this policy have on world real interest rates? R*

Long run model of small open economy to describe effects of expansionary fiscal policy

- small open economy interest rates, investment, net foreign investment, real exchange rates, trade balances

- Graph the effects of this policy on the small open economy market for loanable funds and its foreign currency market (label axes, curves, initial equilibrium values, direction of shift)

Solutions

Expert Solution

In an open economy,there is flexible exchange rates.In this, fiscal policy is more effective.Expansionary fiscal policy is used by the government as a tool to wake up from recession.this helps in increasing the output and employment in an economy.hence leading to boosting the Aggregate Demand in the country.Under expansionary fiscal policy the government spending in various sectors increase.Hence the government had to borrow more funds.hence demand also increases in the capital market.this increase in demand leads to rise in real interest rates.

Rahul Sunny answered 1 year ago

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