Exam 20: Output, the Interest Rate and the Exchange Rate

Suppose a country with a fixed exchange rate decides to decrease the price of its currency. This change in policy is called:

Assume that the current exchange rate between the Australian dollar and the U.K. pound is E = 0.66. If interest parity holds, and the Australian interest rate is 5% while the U.K. interest rate is 7%, the expected exchange rate in one year is:

Assume the interest parity condition holds and that initially i = i*. A decrease in the foreign interest rate will cause:

The exchange rate policy of Australia is:

Assume the exchange rate is allowed to fluctuate freely. Using the IS- LM- IP model, graphically illustrate and explain what effect a monetary contraction will have on the domestic economy. In your graphs, clearly label all curves and equilibria.

In the early 1990s, European unemployment rose largely because of:

In an open economy under flexible exchange rates, an increase in wealth that causes an increase in consumption will cause which of the following?

In an economy operating under flexible exchange rates, explain why the IS curve is downward sloping.

Explain what sudden stops are and their role during the crisis in 2008 and 2009.

Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that the foreign interest rate increases. Discuss what policy makers must do to maintain the pegged exchange rate. Also discuss what effect this will have on domestic output and net exports.

Suppose there is a decrease in the real exchange rate. Which of the following will occur as a result of this change in the real exchange rate?

Assume that there is a simultaneous increase in government spending and a monetary contraction. In a flexible exchange rate regime, we know with certainty that such a policy mix will cause which of the following?

Assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility exists. Given this information, which of the following will occur?

Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that households decide to decrease consumption because of falling consumer confidence. Given this information, we would expect which of the following to occur?

In practice, under the EMS, a member country:

As the economy moves down and to the right along the IS curve, which of the following will occur when exchange rates are flexible?

In an open economy under flexible exchange rates, an increase in the interest rate will cause an increase in which of the following?

In a flexible exchange rate regime, a decrease in the foreign interest rate will cause:

Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a higher level. This is called:

For a country pursuing a fixed exchange rate regime, what does the interest parity condition imply about domestic and foreign interest rates? Explain.