Compare the effectiveness of monetary policy in an open economy with mobile international capital to monetary policy in a closed economy. Why is it different? Use an appropriate diagram to illustrate your answer
An appropriate diagram should resemble Figure 20-7 in the text. Monetary policy is more effective (that is, it has a larger effect on real GDP) in an open economy than it is in a closed economy. A change in monetary policy that is intended to raise aggregate demand to counteract recession will often lower interest rates. A decrease in interest rates will trigger a currency depreciation, which will increase net exports and, therefore, add an additional element to the outward shift in aggregate demand. The foreign exchange market effects further enhance the expansionary effects of looser monetary policy.
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An economy where private individuals guided by the invisible hand make decisions is known as a:
A. market economy. B. centrally planned economy. C. socialist economy. D. barter economy.
When raising taxes, the price effect tells us that the:
A. higher tax rate causes fewer units to be sold. B. government gets more revenue per units sold. C. government gets less revenue per unit sold. D. higher tax rate causes more units to be supplied.
Exhibit 2-13 Production possibilities curve
In Exhibit 2-13, in terms of efficiency:
A. point A is preferred to point B. B. point A is preferred to point E. C. point A is preferred to point D. D. point B is preferred to point A.
Scarce resources give rise to the concept of
A. laissez-faire. B. positive economics. C. efficient markets. D. opportunity costs.