Answer to Question #58620 in Macroeconomics for Onome

Question

The canadian government cuts spending by $1 billion using both words $ diagrams, fully explain how this will affect the Canadian economy.
a.) If Canada is a closed economy
b.) If Canada is an open economy

Answer 1

The canadian government cuts spending by $1 billion then:
a) If Canada is a closed economy, then there will be a decrease in aggregate demand and aggregate supply.
b) If Canada is an open economy, then there will be a lower decrease in aggregate demand and aggregate supply, then in a closed economy, because fiscal multipliers in open economies are lower than in closed economies.