Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession.The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy can increase aggregate demand and stimulate economic growth in the short run, but in an open economy with high capital mobility and fixed exchange rates, it may also lead to higher inflation and trade deficits in the long run. However, the question only asks about the initial and secondary effects, which are likely to be expansionary and therefore strengthen the policy's impact.

Given an Open Economy with High Capital Mobility and Fixed