Question

In: Economics

3.         A country wants to stimulate its economy by increasing government spending (fiscal policy).  The economy is an...

3.         A country wants to stimulate its economy by increasing government spending (fiscal policy).  The economy is an open economy with flexible exchange rates.

What will be the impact of the increased spending?

Consumption will ______________ (increase / decrease).

Investment by businesses will ______________ (increase / decrease).

Aggregate demand will ______________ (increase / decrease).

Real GDP and income in the country will ______________ (increase / decrease).

Imports of goods will _____________ (increase / decrease) as income increases.

The current account will ___________________ (increase / decrease).

So, based on the domestic effects above, income will _____________ (increase / decrease) and the current account will __________________ (increase / decrease).

The increased government spending will generate changes on the international side of the economy.

Interest rates in the country will ____________ (increase / decrease) as the economy expands, which will ____________ (increase / decrease) demand for the currency.

The exchange rate will ______________________ (appreciate / depreciate).

Exports will ___________________ (increase / decrease) and imports will ______________ (increase / decrease).   The current account will ________________  (increase / decrease).

As exports __________________ (increase / decrease), aggregate demand will ________________ (increase / decrease).

So, based on the international effects above, income will _____________ (increase / decrease) and the current account will __________________ (increase / decrease).

Overall, income and GDP in the economy will ______________________ (increase / decrease / be unknown) and the current account will ________________ (increase / decrease / be unknown).

Solutions

Expert Solution

1 - Increase

2 - Increase

3 - Increase

4 - Increase

5 - Increase

6 - Increase

7 - Increase , decrease

In the internation economy

1 - Increase , decrease

2 - depreciate

3 - decrease

4 - Increase

5 - Decrease

6 - Decrease , decrease

7 - Decrease , decrease

8 - Be unknown , decrease

Rahul Sunny answered 2 years ago
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