Question

How does monetary and fiscal policy differ between a closed and open economy? Explain how the effects on monetary and fiscal policy differ under fixed and floating exchange rates?

Answer 1

First, the expansionary fiscal policy increases aggregate demand as government reduces taxes and/or increases spending. ... As a result, an expansionary fiscal policy in an open economy is less effective in changing real GDP and the price level than it is in a closed economy.

Answer 2

, this increases our income and our demand for imports, and ultimately lowers the exchange rate. Contractionary policies have the opposite effect. ... This leads to higher prices domestically and relatively cheaper imports.