In a small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to:
A) decrease government spending.
B) decrease taxes.
C) increase the money supply.
D) decrease the money supply.

Question

Quizplus · Accepted Answer

Decreasing taxes increases disposable income, leading to higher consumption and investment, which can boost equilibrium output in a small open economy with a fixed exchange rate.

In a Small Open Economy with a Fixed Exchange Rate