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

Exhibit: Risk Premium A small open economy with a floating exchange rate is initially in equilibrium at A with IS₁*; LM₁*. If there is an increase in the risk premium, then LM₁* will shift to _____ and IS₁* will shift to _____.

Under a fixed system, the exchange rate:

A member of Parliament wants to reduce the Canadian trade deficit by imposing tariffs on imports. Use a model of a small open economy with a flexible exchange rate to predict the impact of tariffs on Canadian imports, exports, net exports, the exchange rate, and the output level.

When a country abandons its national currency and adopts the currency of the United States, this is known as:

The Mundell-Fleming model assumes that:

In the Mundell-Fleming model, the exogenous variables are the:

The intersection of the IS^* and LM^* curves shows the _____ and the _____ at which both the goods market and the money market are in equilibrium.

If the Mundell-Fleming model is modified to allow the exchange rate to have a direct effect on the consumer price index, then an appreciation of the currency will lead to:

In early 1994, Mexico was adhering to a fixed-exchange-rate system. Use the Mundell-Fleming model to illustrate graphically the short-run impact on the exchange rate and level of output of increased country risk caused by the Chiapas uprising and the assassination of presidential candidate Colosio. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the new short-run equilibrium.

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

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 the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

The Mundell-Fleming model is a _____ model for a _____ open economy.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

To maintain a fixed-exchange-rate system, if the exchange rate (foreign currency/local currency) moves below the fixed-exchange-rate level, then the central bank must:

The risk premium included in the interest rate of small open economies incorporates:

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

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

In the Mundell-Fleming model, the domestic interest rate is determined by the:

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply:

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to _____, and expansionary monetary policy causes the exchange rate to _____.