ABSTRACT
So far we have followed most of the academic literature and much of the more general discussions in considering the possibility of government policy affecting employment and other macroeconomic goals, while ignoring the influence of relations with other countries. In this chapter we shall consider the way that the existence of trading and financial linkages with other countries can influence both the possibilities for demand management in any one country and the appropriate mix of monetary and fiscal policies. In the literature, allowing for these linkages is called ‘open economy’ analysis, while treating them as negligible, as we have implicitly done so far, is the ‘closed economy’ case.
