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Camp Statement

Go live Time : 15 October 2021, 08:31 AM
the domestic interest rate equals the world interest rate plus a risk premium. An increase in government expenditure increases aggregate spending.

The rise in spending will cause an incipient rise in the domestic interest rate.

Capital from abroad will be attracted to the domestic country causing the country’s exchange rate to appreciate

OPEN ECONOMY CONSIDERATIONS Is the effectiveness of fiscal policy in economies open to international trade depends on several factors, including whether a country is large or small relative to the size of the world economy, whether capital can flow freely in and out of the country, and whether a country’s exchange rate is fixed or floating.

Consider, for example, the case of a small country with capital mobility and a flexible exchange rate. Such a country takes the world interest rate as given.

Further, the the domestic interest rate equals the world interest rate plus a risk premium.

An increase in government expenditure increases aggregate spending.

The rise in spending will cause an incipient rise in the domestic interest rate. 
Capital from abroad will be attracted to the domestic country causing the country’s exchange rate to appreciate.

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