1) A small open economy with perfect capital mobility permits its exchange rates to float. If the price level does not vary, examine which policy action has the largest possible real income effects.

2) Draw a diagram to illustrate and examine how the expansionary fiscal policy action with the fixed exchange rate (without sterilization) and high capital mobility affects the balance-of-payments, nominal interest rate, real income, exchange rate and IS schedule.

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1 Fiscal policy is the use of government spending and taxation to influence the economy Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve ... View the full answer