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Compare the Effectiveness of Fiscal Policy in an Open Economy

question 161

Essay

Compare the effectiveness of fiscal policy in an open economy with mobile international capital to fiscal policy in a closed economy.Why is it different? Use an appropriate diagram to illustrate your answer.

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Definitions:

Strike Price

The fixed price at which the holder of an options contract can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.

Transactions Exposure

Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future.

Financial Risk

The possibility of losing money on an investment or business venture; it can arise from various sources like market volatility, credit risk, or operational failures.

Uncertain Prices

Refers to the unpredictability in the cost of goods, services, or assets, often due to factors like market volatility, supply and demand imbalances, or economic uncertainties.

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