In a two-good,two-period model,the government expenditure multiplier

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In a two-good, two-period model, government expenditure increases aggregate demand and output in the short run. However, in an open economy, government expenditure also affects net exports, which can offset some of the initial stimulus. In particular, an increase in government expenditure leads to an increase in income and consumption, which in turn leads to an increase in imports. This reduces net exports and partially offsets the initial increase in aggregate demand. Therefore, the government expenditure multiplier is smaller in an open economy because net exports fall.

In a Two-Good,two-Period Model,the Government Expenditure Multiplier