Question

Regarding macroeconomic policies, is it better to have open economy or closed economy? What are the pros and cons for each of the policy?( 3-4 paragraphs)

Answer 1

The major macroeconomic policies are the fiscal and monetary policy which are used to satisfy different macroeconomic outcomes or goals. The analysis suggests that fiscal policy is more effective in a closed economy which is when no trade takes place and monetary policy is more effective under an open economy where net exports are taken into consideration. Monetary policy controls the liquidity in the economy via money supply while fiscal policy tools are government spending and taxes. Traditional theory suggests that fiscal policy is more effective in fixed exchange rate regime and monetary policy under a floating exchange rate regime. Under a fiscal policy with government control, benefits of open economy do not reach their full potential hence a closed economy would be more desirable in a fiscal policy regime.