How will an increase in federal government spending without an increase in taxes affect real GDP and the price level in the short run in a closed economy and in an open economy?
What will be an ideal response?
In a closed economy, an expansionary fiscal policy directly increases aggregate demand, leading to an increase in real GDP and in the price level. An expansionary fiscal policy also results in the crowding out effect as higher interest rates lower domestic investment and purchases of consumer durables. In an open economy, an expansionary fiscal policy also directly results in an increase in aggregate demand and, therefore, an increase in real GDP and in the price level. However, in addition to lower domestic investment, higher interest rates in an open economy also lead to an increase in the country's foreign exchange rate (when stated in terms of foreign currency per domestic currency), which decreases net exports. The crowding out effect in an open economy is therefore larger than in a closed economy.
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Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $2 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either ________ domestic interest rates, or ________the supply of international reserves by purchasing New Pesos
A. lower; decrease B. lower; increase C. raise; decrease D. raise; increase
According to these relationships, the efficient output level arises where
Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q; MSB = 30 – 0.3Q; MEB = 0. a. QE = 25 b. QE = 40 c. QE = 20 d. none of the above
Equilibrium expenditure is the level of aggregate expenditure at which
A) aggregate planned expenditure equals real GDP. B) aggregate private expenditure equals real GDP. C) planned inventory investment equals zero. D) aggregate production equals real GDP. E) aggregate actual expenditure equals real GDP.
It is easy for one financial institution to reduce its leverage by acting alone, but when many financial institutions try to do the same thing at once, asset prices fall rapidly and bank capital declines for all such institutions
a. True b. False.