With an increase in the budget deficit,the open-economy outcome compared to the closed-economy outcome features a ___________ in Real GDP.

Question

Quizplus · Accepted Answer

An increase in the budget deficit leads to higher interest rates, which in turn leads to a decrease in investment spending and a decrease in net exports due to an appreciation of the currency. This causes a decrease in Real GDP growth in both closed and open economies, but the decrease is relatively smaller in the open economy due to the offsetting effect of increased net exports. Therefore, the open-economy outcome will feature a smaller increase in Real GDP compared to the closed-economy outcome.

With an Increase in the Budget Deficit,the Open-Economy Outcome Compared