In an open economy, fiscal policy has:
A)a smaller impact on aggregate demand as compared to a closed economy.
B)the same impact on aggregate demand as compared to a closed economy.
C)a larger impact on aggregate demand as compared to a closed economy.
D)no impact on aggregate demand.

Question

Quizplus · Accepted Answer

In an open economy, some of the impact of fiscal policy (such as government spending or tax cuts) can be offset by changes in net exports. For example, increased government spending can lead to higher interest rates, which might attract foreign capital, appreciate the domestic currency, and reduce net exports. This leakage into the foreign sector reduces the impact of fiscal policy on aggregate demand compared to a closed economy where all spending remains within the economy.

In an Open Economy, Fiscal Policy Has