EC202 1nd Edition Lecture 37Outline of Last Lecture I. Flexible exchange rateII. Fixed exchange rateIII. Real exchange rateOutline of Current Lecture II. Monetary expansionIII. Fiscal expansionIV. Fed toolCurrent Lecture-monetary expansion-Lowers the interest rate-Increases investment spending-Increases the net capital outflow in the open economy-Currency depreciates-Net exports increase-Consequently, monetary expansion increases real income more in an open economy than in a closed economy-fiscal expansion-The impact on income is smaller in the open economy-As the interest rate increases, the net capital outflow decreases-Exchange rate appreciates-Net exports fallThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-In the open economy, fiscal expansion not only crowds out private investment, but it crowds out net exports as well-Fed tool-Open economies with flexible exchange rates provide-Another tool for monetary policy-Monetary policy is more effective in an open economy with a flexible exchange
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