When government spending or investment increases in an open economy

Question

Quizplus · Accepted Answer

When government spending or investment increases in an open economy, it typically leads to an increase in overall demand, including demand for both domestically produced and foreign products. This means that not all of the extra consumption spending will be on domestically produced goods and services; some will be spent on imports, which are foreign products. This is due to the nature of open economies where consumers have access to and purchase goods and services from international markets.

When Government Spending or Investment Increases in an Open Economy