Expansionary fiscal policy may have an even smaller effect on aggregate demand in the open economy than a closed economy.

Question

Quizplus · Accepted Answer

In an open economy, expansionary fiscal policy can lead to increased interest rates, which may attract foreign capital, causing the domestic currency to appreciate. This appreciation makes exports more expensive and imports cheaper, potentially reducing net exports and thus diminishing the effect of fiscal policy on aggregate demand compared to a closed economy where this channel does not exist.

Expansionary Fiscal Policy May Have an Even Smaller Effect on Aggregate