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An article in the Economist quotes the finance minister of Peru as saying, "We are one of the most open economies of Latin America." Source: "Hold on Tight," Economist, February 2, 2013. Is the fiscal policy in Peru likely to be more or less effective than it would be in a less open economy? Briefly explain.

A. Contractionary fiscal policy will be more effective in an open economy than in a less open economy.

B. Fiscal policy will have a larger impact on aggregate demand in an open economy than in a less open economy.

C. Expansionary fiscal policy will be more effective in an open economy than in a less open economy.

D. Fiscal policy will have a smaller impact on aggregate demand in an open economy than in a less open economy.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

Since the United States has negative net foreign​ investment, its

A. net capital flow must be negative.

B. domestic saving must be less than its domestic investment.

C. exports must be greater than its imports.

D. domestic investment must be less than its domestic saving.

Expansionary fiscal policy is less effective in an open economy because

A. increases in the money supply will reduce interest rates and lower the value of the​ dollar, reducing aggregate demand.

B. increases in government spending can increase interest​ rates, which increases the value of the dollar and crowds out net exports.

C. increases in government spending will be partly spent on imported​ goods, which do not benefit the domestic economy.

D. increases in taxes reduce​ consumption, which in turn reduces consumption of imports and increases net exports.

When the Federal reserve uses contractionary monetary policy to reduce​ inflation, it

A. sells treasury securities increasing interest​ rates, leading to a stronger dollar that lowers net exports in an open economy.

B. buys treasury securities decreasing interest​ rates, leading to a weaker dollar that lowers consumption of durables in a closed economy.

C. sells treasury securities decreasing interest​ rates, leading to a stronger dollar that lowers domestic investment in a closed economy.

D. buys treasury securities increasing interest​ rates, leading to a weaker dollar that increases net exports in an open economy.

If a country saves more than it invests​ domestically, then its net foreign investment must be (positive, negative, or zero)?

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending. 

 

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

 

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

 

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

 

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

 

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

 

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

 

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease 

 

1. One of the shortcomings of fiscal policy is that:

a. it has significant time lags which make it more effective.

b. it takes effect immediately, thus it is the best policy to use at crunch time.

c. it affects aggregate demand indirectly through the interest rate.

d. it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

 

2. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which would most likely result?

a. Equilibrium real GDP will be more than anticipated.

b. The economy could move into a recession.

c. The economy will generate a larger inflationary gap than anticipated.

d. This will not have any adverse effects on the economy, since inflation has been abated.

 

 

3. Assume that the marginal propensity to consume is 0.8 and the potential output is $800 billion. The tax multiplier is ____, and the transfer multiplier is _____:

a. -0.8; 0.8

b. -0.2; 0.25

c. -5.0; 4.0

d. -4.0; 4.0

 

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