Crowding Out in Open Economy
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Crowding Out in Open Economy

This quiz explores the concept of crowding out in an open economy, where an increase in government spending leads to a decrease in public savings and a potential trade deficit. It highlights the differences between open and closed economies in terms of investment spending. Test your understanding of macroeconomic concepts!

Created by
@FancyBougainvillea

Questions and Answers

What happens to the trade deficit when public savings decrease by 25 due to an increase in government spending by 25?

The trade deficit increases

Why is there no complete crowding out of investment spending in the open economy when government spending increases?

Because r is exogenous

What happens to the domestic real exchange rate when government spending increases, ceteris paribus?

It increases, making exports less attractive

What is the effect of the increase in government spending on the attractiveness of foreign goods to domestic consumers?

<p>They become more attractive</p> Signup and view all the answers

What happens to exports when government spending increases, ceteris paribus?

<p>They decrease, making the trade deficit increase</p> Signup and view all the answers

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