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:

Critical Thinking

The process of actively and skillfully conceptualizing, applying, analyzing, synthesizing, and evaluating information gathered from observation, experience, reflection, reasoning, or communication.

General Psychology

The scientific study of mind and behavior, encompassing various aspects of conscious and unconscious experience as well as thought.

Psychobabble

A term used pejoratively to describe the misuse of psychological terminology, often in a way that is vague or meaningless.

Scientific Psychology

The study of mind and behavior through systematic observation, experimentation, and analysis to understand psychological phenomena.