An expansionary monetary policy in an open economy with freely mobile capital and fixed exchange rates is more effective in changing equilibrium output when compared to a closed economy.

Question

Quizplus · Accepted Answer

In an open economy with freely mobile capital and fixed exchange rates, an expansionary monetary policy tends to lead to capital outflows as domestic interest rates fall, which can force the central bank to sell foreign reserves to maintain the fixed exchange rate, often offsetting the initial expansionary effect and making it less effective in changing equilibrium output compared to a closed economy where capital mobility and exchange rate dynamics do not constrain monetary policy.

An Expansionary Monetary Policy in an Open Economy with Freely