Figure 36-6

-In Figure 36-6, an expansive fiscal policy in a closed economy results in an equilibrium at point E.In an open economy, allowing for the effects of the induced change in the currency value, the final equilibrium would be point

Question

Figure 36-6
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-In Figure 36-6, an expansive fiscal policy in a closed economy results in an equilibrium at point E.In an open economy, allowing for the effects of the induced change in the currency value, the final equilibrium would be point

Quizplus · Accepted Answer

An expansive fiscal policy in an open economy would result in an increase in aggregate demand and a trade deficit. This would put downward pressure on the currency value, leading to depreciation. Point J represents the new equilibrium point where the trade deficit is matched by the capital inflows.

Figure 36-6 ​

Figure 36-6