Question

Label each of the following statements true, false or uncertain. Explain briefly

1. Because the spending multiplier in the open economy is lower that the one in the closed economy, fiscal policy is more effective.

5. If the interest rate in Japan is 0, then financial investors are not willing to hold Japanese bonds.

Answer 1

Ans 1=False

A rise in governmental spending will, certainly , cause an escalation in output in an open economy. Although, as the multiplier is lower in an open economy, this augmentation in output will be lesser than in a closed economy. This is so because imports are a rising function of domestic output.

Ans 5=true

The lower rates of interest which are found on bonds, specially government-backed ones, are usually not seen as sufficient by investors. This is the primary driving force behind some investors not keen to invest in bonds.