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Suppose the government of the fictional country of Sutan has

Suppose the government of the fictional country of Sutan has just decreased government expenditures. … Show more Suppose the government of the fictional country of Sutan has just decreased government expenditures. If Sutan were a closed economy, the decrease in government expenditures would decrease output, which in turn, would _______(increase/decrease) money demand and, along with it, the interest rate. The change in the interest rate would cause investment to _______(decrease/increase). Sutan is instead a small open economy with a flexible exchange rate. As a result, in addition to producing the change in investment, the change in interest rate makes Sutanian assets _______(more/less) attractive to savers, causing the Sutanian dollar to _______(depreciate/appreciate) and net exports to _______(increase/decrease). The graphs below show the state of the money market of aggregate demand after the decrease in government expenditures (and subsequent change in interest rate and investment) if Sutan were a closed economy. To reflect the additional changes that you indicated would occur in a small open economy with flexible exchange rates, shift the money demand and/or supply curves in the first graph and the aggregate demand in the second graph. Suppose the shifts in the graphs above were sufficient to bring the economy to its new equilibrium. In this case, you could conclude that the world interest rate is ______(what number?). More generally, you can conclude that fiscal policy in a small open economy with a flexible exchange rate is ______(more/less) effective than fiscal policy in a closed economy. • Show less

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