Explain the conditions under which monetary policy may be effective in an open economy

Expert Solution

In an open economy, the monetary policy is effective in case of a flexible exchange rate system. However, in case of the fixed exchange rate system, any changes made by the Fed to stimulate or affect the economy would not work.

Let us see how it works: In case of floating exchange rate system, suppose the Fed change the interest rate. This change in interest rate would affect the investment and consumption in the economy. On the other side, the change in interest rate would also affect the demand for dollars to invest in the US (which would decline in case of a decline in interest rates). This will further reduce the exchange rate or the foreign currency price of the dollar. The weaker dollar means the exports would become cheaper and thus increase while the imports would decrease. Thus, change in the interest rate in an open economy under the flexible exchange rate regime does not affect only the exchange rate but also the net exports.

Rahul Sunny answered 1 year ago

under what conditions is monetary policy most effective? a liquidity trap a steep LM and relatively...

under what conditions is monetary policy most effective? a liquidity trap a steep LM and relatively flat IS a steep IS and relatively flat LM steep IS and LM President Franklin D. Roosevelt enacted the New Deal in 1933. What was this policy? aggressive fiscal policy designed to provide relief, reform and recovery from the Great Depression An act to preserve the laissez-faire approach to government's role in markets. a policy designed to reduce competition from foreign exporters an offer...

3)Discuss which of the fiscal and monetary policies would be more effective in an open economy...

3)Discuss which of the fiscal and monetary policies would be more effective in an open economy 4)Explain the impact of an increase in public spending, taking into account the three areas of the total supply curve. How the assumptions about expectations effect the slope of the total supply curve? this lesson is fiscal policy please answer with consider

Explain the open economy policy trilemma.

Explain graphically and in words how fiscal and monetary policy affect the macro economy, and under...

Explain graphically and in words how fiscal and monetary policy affect the macro economy, and under what conditions this intervention may be desired. 1. If congress expects a recession next year, what steps can it take to try to prevent it? Explain how such a policy could achieve the desired goal. Illustrate your answer with an appropriate graph 2. If the fed(central bank) is concerned that the economy is overheating and fears that inflation may result, what steps can it...

1. Under which set of conditions is fiscal policy most effective? a vertical LM curve a...

1. Under which set of conditions is fiscal policy most effective? a vertical LM curve a steep IS curve and relatively flat LM curve a relatively flat IS curve and steep LM curve 2. For Keynes the opportunity cost of holding money is? the interest rate earned on bonds the commodities one could have purchased the liquidity associated with money the equity that could have been earned in stocks 3. In terms of the speculative demand for money, how would...

Answer True or False. A.1 Open market policy is an effective way of conducting monetary policy...

Answer True or False. A.1 Open market policy is an effective way of conducting monetary policy by the Central Bank. A 2 According to liquidity preference theory, an increase in interest rates results in a reduction in the prices of securities resulting in speculators selling them and increasing the withholding of cash. A.3 The money supply curve is completely inelastic due to the fact that it does not depend on income changes. A 4 The increase in the money supply...

9. “Under fixed exchange rates the monetary policy is impotent, but the fiscal policy is effective.”...

9. “Under fixed exchange rates the monetary policy is impotent, but the fiscal policy is effective.” Do you agree? Explain. 10. “Chronic budget deficits mean ever-accumulating, unsustainable public debt.” Do you agree? Explain why or why not. Make sure to address the following questions in your essay: a. What is the relationship between public deficits and debt? b. What is meant by “sustainable debt”? How do you know whether the public debt sustainable? c. How is it possible for chronic...

Question

Explain the conditions under which monetary policy may be effective in an open economy

Solutions

Expert Solution

Related Solutions