2 Lessons about fiscal policy In a small open economy with perfect capital mobility, fiscal policy is utterly incapable of affecting real GDP. 。“Crowding out” ·closed economy: Fiscal policy crowds out investment by causing the interest rate to rise. ·small open economy: Fiscal policy crowds out net exports by causing the exchange rate to appreciate. CHAPTER 12 Aggregate Demand in the Open Economy slide 11 slide 11 § In a small open economy with perfect capital mobility, fiscal policy is utterly incapable of affecting real GDP. § “Crowding out” • closed economy: Fiscal policy crowds out investment by causing the interest rate to rise. • small open economy: Fiscal policy crowds out net exports by causing the exchange rate to appreciate. 2