Compare the effectiveness of fiscal policy in an open economy with mobile international capital to fiscal policy in a closed economy. Why is it different? Use an appropriate diagram to illustrate your answer.
What will be an ideal response?
An appropriate diagram should resemble Figure 36-6 in the text. Fiscal policy is less effective (that is, it has less effect on real GDP) in an open economy than it is in a closed economy. A budget deficit that is intended to increase aggregate demand to counteract a recession will often raise interest rates. An increase in interest rates will trigger a currency appreciation, which will have a contractionary effect on the economy since net exports will fall (exports will become more expensive to foreigners and imports will become cheaper). The foreign exchange effects will, therefore, at least partially offset the expansionary effects of stimulative fiscal policy.
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To determine inflation over time, a basket of goods and services is used to track _________ levels.
a. cost b. price c. consumption d. production
During periods of recession unemployment:
A. rates are the same for all groups of the working population. B. is less common. C. is uncorrelated to periods of recession. D. is more common.
Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ________ pesos per barrel in Mexico.
A. 3.125 B. 96 C. 250 D. 200
The longer you have to wait to receive a payment,
A) the lower the interest rate you will charge on the payment. B) the more you are willing to discount the payment. C) the greater value it will have to you. D) the less value it will have to you.