Exam 16: Macroeconomic Policy in an Open Economy

Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect.

Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

Which policy is an $\underline { \text { expenditure-switching } }$ policy?

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy

Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil $\underline { \text { devalue } }$ its currency, one would expect the:

Suppose Brazil faces domestic recession and a current account surplus. Should Brazil $\underline { \text { revalue } }$ its currency, one would expect the:

Exhibit 16.1 At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information. -Refer to Exhibit 16.1. To help drive the dollar's exchange value downward, the Federal Reserve would:

An $\underline { \text { expenditure-increasing } }$ policy would consist of an increase in:

Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause

Given an open economy with high capital mobility, all of the following statements are true except: