In an open economy, monetary policy has:
A)a smaller impact on aggregate demand as compared to a closed economy.
B)the same impact on aggregate demand as compared to a closed economy.
C)a larger impact on aggregate demand as compared to a closed economy.
D)no impact on aggregated demand.

Question

Quizplus · Accepted Answer

In an open economy, monetary policy has a larger impact on aggregate demand as compared to a closed economy because changes in interest rates can affect capital inflows and outflows. In a closed economy, changes in interest rates only affect domestic consumption and investment. However, in an open economy, changes in interest rates can affect the flow of capital across borders, which in turn affects aggregate demand.

In an Open Economy, Monetary Policy Has