Fiscal policy has a greater impact in a closed economy than it does in an open economy.

Question

Quizplus · Accepted Answer

In a closed economy, there are no international trade or financial transactions and hence fiscal policy has a greater impact because changes in government spending and taxation affect only the domestic economy. In an open economy, where there is international trade and capital flows, fiscal policy can still have an impact but it may be more easily offset by changes in exchange rates, interest rates, and capital movements.

Fiscal Policy Has a Greater Impact in a Closed Economy