In an open economy, a contractionary fiscal policy:
A) is very effective in changing real GDP.
B) is not effective in changing real GDP.
C) is not effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) leaves interest rates unchanged.

Question

Quizplus · Accepted Answer

In an open economy, contractionary fiscal policy can be offset by changes in net exports due to exchange rate adjustments, making it less effective in changing real GDP.

In an Open Economy, a Contractionary Fiscal Policy