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

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

Assume that the interest parity condition holds. Also assume that the Australian interest rate is 5% while the U.K. interest rate is 7%. Given this information, financial markets expect the pound to:

Under a fixed exchange rate regime, we know that an increase in stock market wealth that increases consumption will cause:

When the interest parity condition holds, we know that the domestic interest rate must be equal to:

Under a fixed exchange rate regime, we know that a tax increase will cause which of the following?

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

Assume the exchange rate is allowed to fluctuate freely. Using the IS- LM- IP model, graphically illustrate and explain what effect an increase in foreign output (Y*) will have on the domestic economy. In your graphs, clearly label all curves and equilibria.

Assume that the interest parity condition holds and that both the expected exchange rate and the foreign interest rate are constant. Given this information, a decrease in the domestic interest rate will cause:

Assume that there is a simultaneous tax cut and monetary contraction. In a flexible exchange rate regime, we know with certainty that:

Assume the exchange rate is fixed. Using the IS- LM model, graphically illustrate and explain what effect falling consumer confidence will have on the domestic economy. In your graphs, clearly label all curves and equilibria.

In an open economy under flexible exchange rates and represented by the IS- LM- IP model, a tax increase will cause a decrease in which of the following?

Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility. The ability of that country to move its domestic interest rate while maintaining its exchange rate will depend on:

An individual will be indifferent between holding foreign or domestic bonds when which of the following conditions holds?

Explain what the IP curve is and why it is upward sloping.

Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1) an increase in foreign output; (2) a decrease in the foreign interest rate; and (3) an increase in the domestic interest rate.

In the early 1990s, which nation took the lead in driving up European interest rates?

Suppose a country switches from a flexible to a fixed exchange rate. Which of the following will occur as a result of this change?

Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose a budget is passed that calls for a decrease in government spending. This government spending cut will cause which of the following to occur?

Assume that the price levels in two countries are constant. In this situation, we know that:

For this question, assume that all price levels are fixed. Now suppose that there is a real exchange rate depreciation. This real depreciation will cause which of the following to occur?