Author Question: How is the impact of expansionary monetary policy different in an open economy than in a closed ... (Read 114 times)

melina_rosy · **on:** Jun 29, 2018

How is the impact of expansionary monetary policy different in an open economy than in a closed economy?

What will be an ideal response?

Question 2

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier?

A) 10 B) 9 C) 5 D) 1

pikon · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

In an open economy, the lower interest rate resulting from expansionary monetary policy will affect not only consumption and domestic investment, but it will also affect net exports and net capital flows. Lower interest rates will decrease capital inflows and increase capital outflows, resulting in a decrease in the exchange rate (when stated in terms of foreign currency per domestic currency) which will increase net exports. The result is that monetary policy has a stronger effect in an open economy than in a closed economy.

Answer to Question 2

A