INTERNATIONAL TRADE AND FINANCE MULTIPLIER Multiplier Homework Problems Nam a) Open-economy small-country fiscal Multiplier smaller than the closed-economy multiplier? Open-Economy has smaller fiscal multiplier compared to the closed economy because an open economy intends to complicate the domestic decisions policies as the economic policies subjected may alter the trade of balance compared to the closed economy. Similarly, with free markets where there are no barriers, there is an increased employment in the domestic economy creating a link between the foreign and domestic market limiting accelerators forcing the fiscal multiplier to the negative.
Crossed economy increases projections rather than leakages resulting to a higher fiscal multiplier (McConnell & Stanley, P. 69). b) The fiscal expansion multiplier indicate that an increase in government spending will cause trade balance to decrease Increased in the government spending on has a significant impact on economic growth without causing an increase in the trade balance. For example, when the government is spending more imports, military and aids programs, the government long-term economic growth will be harmed causing a reduction in domestic investment. Therefore, with increased government spending on a non-income generating activities will be indicated by a fiscal expansion multiplier on trade balance to be decreasing (McConnell & Stanley, P.
73). c) The devaluation multiplier indicates that an increase in government spending will increase in trade balance Increased government spending by changing the tax rates and increasing tax incentives will cause increased labor intensiveness in its domestic economy. Increased government spending will thereby intend to reduce the current account deficit increasing competitiveness in its goods and services creating open markets that will then cause a multiplier effects to be less as a result of increased domestic income (McConnell & Stanley, P.
87). 2. a) the two country multiplier normally has an expected magnitude of less than one, circumstance that is equal or greater than one Two-country multiplier normally has an expected magnitude less than one. However, the magnitude can be equal or greater than one at a circumstance where there is a national income give rise to a multiplier effect caused by increased consumption spending. At this point, the initial injection in a country’s economy will result in an increased national forcing an increased aggregate demand and an increased output.
Similarly, the expected magnitude increase in situations of crisis such as high rates of unemployment as well as increased expenditure (McConnell & Stanley, P. 69). b) The large-country fiscal multiplier larger than the small country fiscal multiplier The large country fiscal multiplier is significantly large compared to the small country fiscal multiplier because large countries have a higher economic projections and economic spending compared to the small countries. In addition, large countries have a greater aggregate demand that is accompanied by an increased output causing the expected magnitude to increase to a level of magnitude effect greater than one.
Therefore, the resultant effect causes large-country multiplier to be larger than the smaller country multiplier (McConnell & Stanley, P. 82). c) The trade-balance multiplier shows that the change in multiplier caused by an increase in domestic income is less in the large case. Why is this true Large (two-country) case domestic income increase causes a smaller multiplier compared than closed economy. For this example, an increase in domestic income would cause a corresponding effect in the trade balance in a small (two-country) case resulting to a foreign income repercussion that further increases the true multiplier spending.
In this regard, with increased income will force a country to change its import and export rates causing a corresponding change in foreign income and production (McConnell & Stanley, P. 89). Bibliography McConnell, Campbell R, & Stanley L. Brue. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill/Irwin, 2005. Print.