Exam 25: Economic Policy in the Open Economy Under Fixed Exchange Rates

In a system of fixed exchange rates, the automatic balance-of-payments adjustment process for a country with a balance-of-payments deficit would theoretically involve, among other things, in the interest rate and in national income.

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Question 1

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"Attempts to stimulate an economy with expansionary monetary policy will lead only to a loss of some of the country's international reserves and to no permanent change in income under a fixed-rate system." Agree? Disagree? Explain.

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Question 2

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I disagree with the statement that attempts to stimulate an economy with expansionary monetary policy will lead only to a loss of some of the country's international reserves and to no permanent change in income under a fixed-rate system.

Expansionary monetary policy, which involves increasing the money supply and lowering interest rates, can have a positive impact on the economy. By lowering interest rates, it encourages borrowing and spending, which can lead to increased investment and consumption. This, in turn, can lead to higher levels of economic activity and potentially higher income levels.

Under a fixed-rate system, where the exchange rate is pegged to another currency or a basket of currencies, expansionary monetary policy can lead to a loss of international reserves if it results in capital outflows. However, it can also lead to a permanent change in income if it successfully stimulates economic growth and increases overall productivity.

In conclusion, while expansionary monetary policy under a fixed-rate system may lead to a loss of international reserves in the short term, it can still have a lasting impact on income levels if it effectively stimulates economic activity and growth. Therefore, the statement does not accurately capture the potential outcomes of expansionary monetary policy under a fixed-rate system.

In the situation pictured in Question #13 above, during the automatic adjustment process to the disequilibrium in the balance of payments,

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Question 3

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Other things equal, if the if the demand for money becomes more elastic, then the LM Curve will become , i.e., a given rise in the interest rate will, in order for Money market equilibrium to be preserved, be associated with a rise in Income.

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Question 4

From an initial equilibrium position for the economy (at the three-way intersection of the IS, LM, and BP curves), and if the LM curve is steeper than the BP curve, expansionary fiscal policy initially leads to a balance-of-payments (BOP) , and expansionary monetary policy .

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Question 5

In a closed economy, an increase in the demand for money shifts the LM curve to the ; other things equal, this will lead to in national income.

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Question 6

Under fixed exchange rates,

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Question 7

"A country that must adopt foreign exchange controls because of a misaligned exchange rate sacrifices the use of both monetary and fiscal policy instruments to influence domestic income and the interest rate." Explain.

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Question 8

Using the Mundell-Fleming diagram dealing with internal balance (IB) and external balance (EB), explain what is meant by effective policy instrument choice, being careful to identify clearly the critical elements of the diagram. Why is the EB curve postulated to be more interest-elastic than the IB curve? In what ways is the IS/LM/BP model preferable to the simple Mundell-Fleming diagram?

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Question 9

Under a fixed exchange rate, a balance-of-payments surplus for a country will lead to a in the money supply as the country's central bank in order to maintain the fixed exchange rate.

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Question 10

Assume an initial equilibrium position for the economy (at the three-way intersection of The IS, LM, and BP curves), and also assume that the BP curve is vertical. This situation Is one where there is of financial capital internationally, and, from this initial equilibrium, expansionary fiscal policy would initially lead to a balance-of-payments .

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Question 11

Suppose, in the basic Mundell-Fleming diagram that plots the internal balance (IB) and external balance (EB) schedules against the interest rate (i) and government spending minus taxes (G - T), that the economy is located at a point that is above (or to the left) of the IB schedule and also above (or to the left) of the EB schedule. In this situation the economy is experiencing

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Question 12

Other things equal, a fall in the marginal propensity to save will make the IS curve , and a rise in the responsiveness of short-term international financial capital To changes in the interest rate will make the BP curve .

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Question 13

Explain, in the IS/LM/BP framework with fixed exchange rates, the impact of an autonomous increase in foreign demand for a country's exports upon the country's national income, money supply, and balance of payments. If there is no impact on a variable, explain why.

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Question 14

In the following diagram, with fixed exchange rates, The economy is in domestic equilibrium at income level and there is.

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Question 15

In the ordinary analysis of IS and LM curves (ignoring the BP curve),

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Question 16

Other things equal, a rise in income in a country will lead to in the demand for money in the country and consequently to in the country's LM curve.

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Question 17

In the graph below, if point W represents the income and interest rate targets under a Country's fixed exchange rate system, then the policy combination needed to reach point W consists of

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Question 18

A general rule is that, as international capital mobility for a country increases, the Country's BP curve __________.

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Question 19

With imperfect capital mobility, the BP curve slopes upward because, starting from a Given balance-of-payments equilibrium position, a rise in national income will tend to Cause a , which must be counteracted by a rise in the interest rate in order to Cause a that will restore BOP equilibrium.

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Question 20

Showing 1 - 20 of 28

Exam 25: Economic Policy in the Open Economy Under Fixed Exchange Rates

In a system of fixed exchange rates, the automatic balance-of-payments adjustment process for a country with a balance-of-payments deficit would theoretically involve, among other things, __________ in the interest rate and __________ in national income.

"Attempts to stimulate an economy with expansionary monetary policy will lead only to a loss of some of the country's international reserves and to no permanent change in income under a fixed-rate system." Agree? Disagree? Explain.

In the situation pictured in Question #13 above, during the automatic adjustment process to the disequilibrium in the balance of payments,

Other things equal, if the if the demand for money becomes more elastic, then the LM Curve will become __________, i.e., a given rise in the interest rate will, in order for Money market equilibrium to be preserved, be associated with a __________ rise in Income.

From an initial equilibrium position for the economy (at the three-way intersection of the IS, LM, and BP curves), and if the LM curve is steeper than the BP curve, expansionary fiscal policy initially leads to a balance-of-payments (BOP) __________, and expansionary monetary policy __________.

In a closed economy, an increase in the demand for money shifts the LM curve to the __________; other things equal, this will lead to __________ in national income.

Under fixed exchange rates,

"A country that must adopt foreign exchange controls because of a misaligned exchange rate sacrifices the use of both monetary and fiscal policy instruments to influence domestic income and the interest rate." Explain.

Under a fixed exchange rate, a balance-of-payments surplus for a country will lead to a __________ in the money supply as the country's central bank __________ in order to maintain the fixed exchange rate.

Other things equal, a fall in the marginal propensity to save will make the IS curve __________, and a rise in the responsiveness of short-term international financial capital To changes in the interest rate will make the BP curve __________.

Explain, in the IS/LM/BP framework with fixed exchange rates, the impact of an autonomous increase in foreign demand for a country's exports upon the country's national income, money supply, and balance of payments. If there is no impact on a variable, explain why.

In the following diagram, with fixed exchange rates, The economy is in domestic equilibrium at income level __________ and there is__________.

In the ordinary analysis of IS and LM curves (ignoring the BP curve),

Other things equal, a rise in income in a country will lead to __________ in the demand for money in the country and consequently to __________ in the country's LM curve.

In the graph below, if point W represents the income and interest rate targets under a Country's fixed exchange rate system, then the policy combination needed to reach point W consists of

A general rule is that, as international capital mobility for a country increases, the Country's BP curve __________.

Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo

The Classical World of David Ricardo and Comparative Advantage

Extensions and Tests of the Classical Model of Trade

Introduction to Neoclassical Trade Theory: Tools to Be Employed

Gains From Trade in Neoclassical Theory

Offer Curves and the Terms of Trade

The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

Empirical Tests of the Factor Endowments Approach

Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Economic Growth and International Trade

International Factor Movements

The Instruments of Trade Policy

The Impact of Trade Policies

Arguments for Interventionist Trade Policies

Political Economy and Us Trade Policy

Economic Integration

International Trade and the Developing Countries

The Balance-Of-Payments Accounts

The Foreign Exchange Market

International Financial Markets and Instruments: an Introduction

The Monetary and Portfolio Balance Approaches to External Balance

Price Adjustments and Balance-Of-Payments Disequilibrium

National Income and the Current Account

Economic Policy in the Open Economy Under Flexible Exchange Rates

Prices and Output in the Open Economy: Aggregate Supply and Demand

Fixed or Flexible Exchange Rates

The International Monetary System: Past, Present, and Future

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In a system of fixed exchange rates, the automatic balance-of-payments adjustment process for a country with a balance-of-payments deficit would theoretically involve, among other things, in the interest rate and in national income.

Other things equal, if the if the demand for money becomes more elastic, then the LM Curve will become , i.e., a given rise in the interest rate will, in order for Money market equilibrium to be preserved, be associated with a rise in Income.

From an initial equilibrium position for the economy (at the three-way intersection of the IS, LM, and BP curves), and if the LM curve is steeper than the BP curve, expansionary fiscal policy initially leads to a balance-of-payments (BOP) , and expansionary monetary policy .

In a closed economy, an increase in the demand for money shifts the LM curve to the ; other things equal, this will lead to in national income.

Under a fixed exchange rate, a balance-of-payments surplus for a country will lead to a in the money supply as the country's central bank in order to maintain the fixed exchange rate.

Other things equal, a fall in the marginal propensity to save will make the IS curve , and a rise in the responsiveness of short-term international financial capital To changes in the interest rate will make the BP curve .

In the following diagram, with fixed exchange rates, The economy is in domestic equilibrium at income level and there is.

Other things equal, a rise in income in a country will lead to in the demand for money in the country and consequently to in the country's LM curve.