CHAPTER 16
MACROECONOMIC POLICY IN AN OPEN ECONOMY
CHAPTER OVERVIEW
This chapter conducts a survey of macroeconomic policy in an open economy. International economic policy refers
to various government activities that influence trade patterns among nations, including (1) monetary and fiscal
and inflation could revalue its currency. Such policies are dependent upon the willingness of other nations to refrain
from implementing offsetting exchange-rate adjustments.
For an open economy with a fixed exchange rate system and high capital mobility, fiscal policy is more successful,
and monetary policy is less successful, in promoting internal balance than for a closed economy. If the economy
has a floating exchange-rate system, monetary policy is more successful, and fiscal policy is less successful, in
After completing the chapter, students should be able to:
• Identify the tools of international economic policy.
• Discuss how nations use expenditure-changing policies and expenditure-switching policies to achieve overall
BRIEF ANSWERS TO STUDY QUESTIONS
1. Internal balance consists of full employment with price stability. External balance consists of balance–of–
payments equilibrium. Overall balance consists of internal balance plus external balance.
3. An expenditure-changing policy refers to a government’s attempt to induce changes in aggregate demand, via
4. International economic policy formation faces political constraints such as society’s willingness to bear inflation
or unemployment as part of the balance–of-payments adjustment process.
5. Under a system of fixed exchange rates and high capital mobility, an expansionary fiscal policy is more
successful in stimulating the economy, and an expansionary monetary policy is less successful, than it is in a
6. Policy agreement occurs when a given policy can improve two or more economic objectives at the same
7. Obstacles to successful international economic policy coordination include: (1) different national economic