Question

1. If there are no transfers or net? investment, it must be true that net exports are ( greater than / equal to / less than / not related to ) net foreign investment

2. In an open? economy, an expansionary fiscal policy on the part of the government of Japan will? cause:

A. an increase in interest rates in Japan which may have a larger crowding out effect than in a closed economy.
B. an increase in interest rates in Japan which may have a smaller crowding out effect than in a closed economy.
C. a decrease in interest rates in Japan which may have a larger crowding out effect than in a closed economy.
D. an decrease in interest rates in Japan which may have a smaller crowding out effect than in a closed economy.

Answer 1

1. Equal to

If there are no transfers or net investment, it must be true that net exports are equal to net foreign investment. Every transaction that affects one side must also affect the other side by the same amount.

2. A.) a increase in interest rates in Japan which may have a larger crowding out effect than in a closed economy.

Expansionary fiscal policy is less affective in an open economy because government spending can cause crowding out of net exports.

In a closed economy fiscal expansion will lead to an increase in the real interest rate and decrease in investment.

In a small open economy fiscal expansion will lead to a trade deficit and appreciation in the real exchange rate

In a large open economy, fiscal expansion will lead to:

(a) An increase in the real interest rate and decrease in investment and,

(b) Trade deficit and an appreciation of real exchange rate