Exam 13: The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on: a. domestic investment. b. domestic output.

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Question 1

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a.Since the world interest rate does not change, domestic investment will not change in the small open economy, but the domestic interest rate will decrease in the large open economy, which will increase domestic investment.
b.The monetary expansion increases domestic output in both economies, but through different pathways. In the small open economy, the monetary expansion will reduce the exchange rate, increasing domestic output via an increase in net exports (and induced consumption spending through the increase in income). In the large open, economy, output increases not only because of the increase in net exports, but the monetary expansion also reduces the domestic interest rate and increases domestic investment.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:

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Question 2

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Compare the effects of an import quota on output under: a.a flexible exchange rate. b.a fixed exchange rate.

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a.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right. Since the LM curve is vertical, the exchange rate appreciates, but output remains unchanged.
b.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right, leading to an increase in the interest rates and, hence, putting pressure on the exchange rate to appreciate. To keep the exchange rate fixed, the central bank has to increase the money supply causing a rightward shift in the LM curve and an increase in output.

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

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Question 4

Fill in the blanks: a. In a closed economy IS-LM model, fiscal expansion raises ___, whereas in a small open economy with a floating exchange rate IS-LM model, fiscal expansion leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the ___regime.

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Question 5

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

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Question 6

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:

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Question 7

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _ increase income, and under fixed exchange rates, expansionary monetary policy _ increase income.

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Question 8

In the Mundell-Fleming model:

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Question 9

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Bank of Canada cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

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Question 10

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

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Question 11

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

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Question 12

In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.

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Question 13

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _, and in an economy with fixed exchange rates, import restrictions cause net exports to _.

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Question 14

Compared to a closed economy, an open economy is one that:

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Question 15

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

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Question 16

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

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Question 17

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

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Question 18

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _ curve will shift to _.

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Question 19

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

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Question 20

Showing 1 - 20 of 106

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on: a. domestic investment. b. domestic output.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:

Compare the effects of an import quota on output under: a.a flexible exchange rate. b.a fixed exchange rate.

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

Fill in the blanks: a. In a closed economy IS-LM model, fiscal expansion raises ___, whereas in a small open economy with a floating exchange rate IS-LM model, fiscal expansion leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the ___regime.

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _ increase income, and under fixed exchange rates, expansionary monetary policy _ increase income.

In the Mundell-Fleming model:

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Bank of Canada cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _, and in an economy with fixed exchange rates, import restrictions cause net exports to _.

Compared to a closed economy, an open economy is one that:

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _ curve will shift to _.

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Islm Model

Aggregate Demand Ii: Applying the Islm Model

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

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Exam 13: The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on: a. domestic investment. b. domestic output.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:

Compare the effects of an import quota on output under: a.a flexible exchange rate. b.a fixed exchange rate.

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

Fill in the blanks: a. In a closed economy IS-LM model, fiscal expansion raises _____, whereas in a small open economy with a floating exchange rate IS-LM model, fiscal expansion leaves _____ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the _____regime.

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _____ increase income, and under fixed exchange rates, expansionary monetary policy _____ increase income.

In the Mundell-Fleming model:

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Bank of Canada cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _____, and in an economy with fixed exchange rates, import restrictions cause net exports to _____.

Compared to a closed economy, an open economy is one that:

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Islm Model

Aggregate Demand Ii: Applying the Islm Model

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

Filters

Fill in the blanks: a. In a closed economy IS-LM model, fiscal expansion raises ___, whereas in a small open economy with a floating exchange rate IS-LM model, fiscal expansion leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the ___regime.

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _ increase income, and under fixed exchange rates, expansionary monetary policy _ increase income.

In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _, and in an economy with fixed exchange rates, import restrictions cause net exports to _.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _ curve will shift to _.