BBG 101 Lecture Notes - Lecture 14: Foreign Portfolio Investment, Xm Satellite Radio, Fiscal Policy
2 Nov 2020
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Document Summary
The multiplier effect: each increase in g can generate more than a increase in aggregate demand. Also true for the other components of gdp. Example: suppose a recession overseas reduces demand for australian net exports by b. The fall in y causes c to fall, which further reduces aggregate demand and income: the crowding out effect. Fiscal policy has another effect on ad that works in the opposite direction. So, the size of the ad shift may be smaller than the initial fiscal expansion. This is called the crowding-out effect. which reduces investment, which reduces the net increase in agg demand. Australians participate in the australian economy, and in economies around the world. For example, we may buy goods made overseas (e. g. an iphone or a hyundai car), services provided overseas (travel in europe) or shares in us companies. An open economy interacts with other countries in three ways.
