Deck 16: Macroeconomic Policy in an Open Economy

Question 1

Distinguish among external balance, internal balance, and overall balance.

Answer 1

A nation is considered to be externally balanced when it realizes neither deficits nor surpluses in its current account.
Internal balance is achieved when its economy is fully employed with a reasonable amount of inflation.
The overall balance of a nation is established when the nation attains both internal and external balance.

Question 2

What are the most important instruments of international economic policy?

Answer 2

The most important instruments of international economic policy include:
1. Monetary and fiscal policies
2. Exchange rate adjustments
3. Tariff and nontariff trade barriers
4. Foreign-exchange controls and investment controls
5. Measures that promote exports

Question 3

What is meant by the terms expenditurechanging policy and expenditure-switching policy? Give some examples of each.

Answer 3

Expenditure-changing policies are policies that change the volume of aggregate demand for goods and services. It also changes the level of total spending for imported and domestically produced goods. Examples of expenditure-changing policies include fiscal policies, which alter government spending, and taxes, and monetary policies, which change the money supply and interest rates.
Expenditure-switching policies are policies that change the direction of demand between domestic output and imports. Examples of such policies include direct controls such as tariffs and quotas which attempt to redirect domestic spending away from foreign goods to domestically-produced goods.

Question 4

What institutional constraints bear on the formation of economic policies?

Question 5

Under a system of fixed exchange rates and high capital mobility, is monetary policy or fiscal policy better suited for promoting internal balance? Why?

Question 6

What is meant by the terms policy agreement and policy conflict?

Question 7

What are some obstacles to successful international economic policy coordination?