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effectiveness of fiscal and monetary policy under closed and open economies

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Answer to a math question effectiveness of fiscal and monetary policy under closed and open economies

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The effectiveness of fiscal and monetary policy in an open economy depends on several factors, such as the degree of openness of the economy (the extent to which it is integrated with the rest of the world), the exchange rate regime (the degree to which it is fixed or flexible), the degree of competition (the extent to which prices are determined by market forces or by government intervention), and the degree of coordination (the extent to which countries cooperate or compete with each other). According to some studies, fiscal policy is more effective in a closed economy than in an open economy because it can directly affect domestic output and employment without worrying about spillover effects on other countries. However, according to other studies, fiscal policy is less effective in a closed economy than in an open economy because it faces crowding out from private investment due to higher interest rates caused by higher government borrowing. Similarly, according to some studies, monetary policy is more effective in an open economy than in a closed economy because it can directly affect domestic output and employment through changes in interest rates without worrying about spillover effects on other countries. However, according to other studies, monetary policy is less effective in an open economy than in a closed economy because it faces crowding out from private investment due to higher interest rates caused by higher money supply.

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