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An economy that is open to capital flows has two channels for the monetary transmission mechanism, while an economy closed to capital flows has only one. [Hint: Explain in the context of an increase in interest rates in both types of economies.]

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Casey Durgan
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7 Dec 2018
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Related questions

True, False, or Uncertain

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. It is the explanation that is important.

A6-5. The increased availability of credit cards has resulted in an increase in the money supply.

A6-6. An economy that is open to capital flows has two channels for the monetary transmission mechanism, while an economy closed to capital flows has only one. [Hint: Explain in the context of an increase in interest rates in both types of economies.]

A6-7. A central bank trying to increase interest rates can do so without decreasing the money supply.

A6-8. When an economy goes into recession, a central bank that is interested in targeting inflation should pursue an expansionary monetary policy

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Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that is in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

An open economy is currently producing at an output level that exceeds its long-run production capacity. To bring output back to the full-employment level, the central bank adjusts the target for the overnight rate to close the output gap. What should the central bank do? Also, describe how the monetary transmission mechanism works for the proposed change in monetary policy (i.e., describe how does the change in the target for the overnight rate affect the economy through different channels).

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