For a small open economy with perfect capital mobility, fiscal policy cannot affect real GDP. while expansionary monetary policy will increase its domestic income and employment at the expense of losses abroad TRUE and FALSE
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For a small open economy with perfect capital mobility, fiscal policy cannot affect real GDP. while expansionary
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- Consider two large open economies - U.S. and Europe. If expansionary fiscal policy is adopted in Europe, what happens in the U.S? net capital outflow rises, the real interest rate falls and investment spending rises. net capital outflow falls, the real interest rate rises and investment spending rises. net capital outflow falls, the real interest rate rises and investment spending falls. net capital outflow rises, the real interest rate rises and investment spending falls. In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate: rises, while the real exchange rate falls and net exports rise. falls, while the real exchange rate rises and net exports fall. rises, while the real exchange rate rises and net exports fall. falls, while the real exchange rate rises and net exports rise. Political instability in the U.S. Political instability in the U.S.A central bank whose sole purpose is to stabilize price growth will never cooperate with an expansionist fiscal policy. Starting at equilibrium and in the context of the national income identity, a sudden increase in private investment holding the government budget deficit fixed implies a trade surplus. Consider an economy that is open to international trade and in which the domestic real interest rate matches the average world interest rate. In the context of the loanable funds market if there are no restrictions on capital movements across borders, an increase in taxes while government spending remains fixed will lead to an appreciation of the real exchange rate.Which of the following is a true statement describing expansionary fiscal policy’s impact in open and closed economies? Select one: a. Expansionary fiscal policy crowds out only investment spending and purchases of consumer durables in an open economy. b. Expansionary fiscal policy crowds out investment spending, purchases of consumer durables and net exports in an open economy. c. Expansionary fiscal policy crowds out investment spending, purchases of consumer durables and net exports in a closed economy. d. Expansionary fiscal policy does not crowd out investment spending and purchases of consumer durables in an open economy.
- Assuming a fixed exchange rate policy, discuss the effectiveness of contractionary fiscal policy designed to decrease output.Given that a country has a large and possibly unsustainable current account deficit, explain how you can reduce it using each of the following approaches: Elasticity approach The absorption approach The monetary approach Suggest solutions to the limitations of each of the three approaches in a) above.SECTION 4: TRUE OR FALSE OR UNCERTAIN 25. According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. 26. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output 27. Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. 28. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. 29. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. 30. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.
- Consider two large open economies - U.S. and Europe. If expansionary fiscal policy is adopted in Europe, what happens in the U.S? Select one: A. net capital outflow rises, the real interest rate falls and investment spending rises. B. net capital outflow falls, the real interest rate rises and investment spending rises. C. net capital outflow falls, the real interest rate rises and investment spending falls. D. net capital outflow rises, the real interest rate rises and investment spending falls.graphically compare effects of monetary or fiscal expansion on equilibrium output in closed and open economy. EXPLAIN your resultsFuture U.S. deficits could be decreased by options: increasing transfer payments and decreasing interest payments on the debt increasing government expenditures and decreasing taxes decreasing current and future taxes decreasing government expenditures and increasing taxes
- Which of the following statements accurately describes the crowding out effect? a. For a given country, assuming no change in trade balances and private savings, an increase in government borrowing would lead to a reduction in private investment. b.For a given country, assuming no change in trade balances and private savings, an increase in government borrowing would lead to an increase in private investment. c. For a given country, assuming no change in trade balances and private savings, an increase in government borrowing would lead to a reduction in private savings. d. For a given country, assuming an increase in trade deficit, an increase in government borrowing would lead to a reduction in private savings.Explain the expansionary fiscal policy in the short run and long run (ignoring exchange rate and capital flows).Consider a small open economy that fixes its currency to gold. This country can freely conduct domestic monetary policy to respond to domestic unemployment and inflation conditions only if it also imposes controls on capital mobility. True or False? Explain. (macroeconomics)