Why Is Monetary Policy More Effective in an Open Economy

question 68

Multiple Choice

Why is monetary policy more effective in an open economy than in a closed economy?

• A)Trade deficits affect exchange rates, which can offset adverse interest rate effects.
• B)Borrowers can choose to use foreign capital, so that interest rate effects are stronger than expected.
• C)Interest rate changes affect exchange rates, so that capital flows reinforce the effect of monetary policy.
• D)Banks can choose to lend to foreigners, so that interest rate effects are essentially nullified.

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Definitions:

Oral Rehydration Therapy

A simple, cost-effective treatment used to prevent dehydration due to diarrhea, involving the oral ingestion of a solution of salts and sugars.

Dehydration

A condition resulting from the excessive loss of water from the body.

Plasticity

The tendency of new parts of the brain to take up the functions of injured parts.

Brain Compensate

The process by which the brain adjusts or alters its function in response to damage, injury, or developmental issues.