In moving from a small to a large open economy model under fixed exchange rates,fiscal policy

Question

Quizplus · Accepted Answer

In a large open economy, there are more channels through which fiscal policy can affect the economy, such as changes in exports and imports. However, under fixed exchange rates, the exchange rate cannot adjust to offset the effects of fiscal policy, which limits its effectiveness compared to in a small open economy. Therefore, fiscal policy loses some of its effectiveness.

In Moving from a Small to a Large Open Economy