Holding Everything Else Constant, Compare the Impact of a Monetary

Question

Examlex · Accepted Answer

The Answer is a.Since the world interest rate does not change, domestic investment will not change in the small open economy, but the domestic interest rate will decrease in the large open economy, which will increase domestic investment.
b.The monetary expansion increases domestic output in both economies, but through different pathways. In the small open economy, the monetary expansion will reduce the exchange rate, increasing domestic output via an increase in net exports (and induced consumption spending through the increase in income). In the large open, economy, output increases not only because of the increase in net exports, but the monetary expansion also reduces the domestic interest rate and increases domestic investment.

Holding Everything Else Constant, Compare the Impact of a Monetary

Definitions: