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

During periods of economic downturn, there is frequently pressure to protect domestic production from foreign competition in the belief that protectionist policies will save domestic jobs. Will protectionist policies increase or decrease domestic production in a small open economy with a floating exchange rate, holding all else constant? Illustrate your answer graphically and explain in words.

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _____ would drive the domestic interest rate back to the level of the world interest rate.

According to the Mundell-Fleming model, under:

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with equilibrium exchange rate e₂, and equilibrium output Y₁. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

A monetary union with a common currency is an example of a:

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

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

Macroland is a small open economy with perfect capital mobility and a flexible-exchange-rate system. Macroland is initially in equilibrium at the natural level of output with balanced trade. Compare the impact of a tax cut in the short run (when prices are fixed) and in the long run (when prices are flexible) on: (a) output, b) consumption, (c) investment, (d) net exports, and (e) the exchange rate.

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:

Exhibit: IS*-LM* A small open economy with a fixed exchange rate e₂ is initially at equilibrium A with IS₁*, LM₁* and equilibrium output Y₁. If there is a monetary expansion, the new equilibrium will be at _____, holding everything else constant.

One argument favouring a floating-exchange-rate system is that it:

In the Mundell-Fleming model, if the price level falls, then the equilibrium income _____ and the real exchange rate _____.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

The government of a small open economy with perfect capital mobility wants to establish a "stronger" currency by moving its exchange rate higher. Suggest both an appropriate monetary policy adjustment and an appropriate fiscal policy adjustment that would allow the economy to move to a higher exchange rate. What are the consequences of these adjustments on domestic output and net exports?

During the Great Depression, countries that devalued their currencies generally _____, whereas countries that maintained the old exchange rate _____.

Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r - 200 + 2 (M / P). This IS curve is given by Y = 400 + 3G - 2T + 3NX - 200r. The function for the net exports is NX = 200 - 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r^* = 2.0 percent, and the exchange rate is initially 1.0. a.If M = 100, G = 100, and T = 100, solve for the equilibrium short-run values of Y and NX. Is the initially given exchange rate equal to the equilibrium exchange rate? b.If the Bank of Canada buys bonds in order to raise the money supply, will equilibrium Y increase?

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:

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 floating exchange rates, lead to: