Exam 23: Internal and External Balance With Fixed Exchange Rates

Consider a country that has an official settlements balance surplus and is experiencing upward pressure on the exchange rate value of its currency. Which of the following will NOT be true in this context?

Assume that the FE curve is flatter than the LM curve. A negative internal shock shifts the IS curve leftward. Under zero sterilization, which one of the following will happen next?

If international capital flows are highly responsive to interest rates, expansionary fiscal policy will:

Consider a country with a fixed exchange rate that is experiencing a deficit in it overall payments balance. Show graphically (using IS-LM-FE) and explain how a change in domestic monetary policy could attempt to quickly eliminate the payments deficit. What could be a possible threat to the economy due to the policy change?

The sum of currency and bank deposits at the central bank is called:

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is flatter than the LM curve. Assume that the economy was initially at point A. Which of the following would have moved the economy to point B?

According to the assignment rule, which of the following policy mixes is appropriate for a country with high unemployment, a balance of payments deficit, and fixed exchange rates?

Assume that the FE curve is flatter than the LM curve. A negative external capital-flow shock shifts the FE curve left. Under zero sterilization, which one of the following will happen next?

Why is a depreciation or devaluation of the nation's currency unable to eliminate a trade balance deficit when the country's demand for imports and the foreign demand for the country's exports are both highly inelastic?

The combination of currency and bank deposits at the central bank is called the money supply.

With fixed exchange rates, fiscal policy is more powerful with a high degree of capital mobility than with a low degree of capital mobility.

Which of the following indicates taking an action to reverse the effect of official intervention on the domestic money supply?

Monetary policy under a fixed exchange rate regime will be:

The initial impact of _____ the money supply _____ the balance of payments.

Which of the following is NOT true with fixed exchange rates and perfect capital mobility?

A central bank can sterilize the increase in the money supply that results from an intervention to defend a fixed exchange rate by selling domestic government bonds.

According to the assignment rule, if a country has excessive inflation and a balance of payments surplus, it should ease monetary policy and tighten fiscal policy.

If international capital flows are not very responsive to interest rates, the initial impact of expansionary fiscal policy will:

Under perfect capital mobility and fixed exchange rates, expansionary _____ is especially effective because the _____.

If a country with high unemployment, a balance of payments deficit, and fixed exchange rates decides to abandon it fixed exchange rate and allow its exchange rate to float, which among the following will be a probable effect?