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

If the Bank of Canada announces that it will fix the exchange rate at 100 yen per Canadian dollar, but with the current money supply the equilibrium exchange rate is 150 yen per dollar, then:

Some economists argue that monetary union does not work as well in Europe as it does in Canada and the United States for all of the following reasons except:

Holding everything else constant, analyze the impact of an increase in the world interest rate on the output of a small open economy under a flexible exchange rate regime.

Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming model to illustrate graphically the impact of an increase in the world interest rate on the exchange rate and level of output in a small open economy with a floating-exchange-rate system. 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.

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 fixed exchange rates, lead to:

Who fixes the quantity of real money balances in closed and open economies? In a small open economy, the interest rate R is determined by what rate?

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.

If there is a fixed-exchange-rate system, then in the long run:

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM^* curve:

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to _____ the central bank, which causes the money supply to _____.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS^* curve shifts to the right, raising the exchange rate:

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS^* curve:

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with IS*₁, LM*₁, equilibrium exchange rate e₂, and equilibrium output Y₁. If there is an increase in government spending to IS*₂, the new equilibrium will be at _____, holding everything else constant.

Suppose the government of a small open economy with a floating exchange rate imposes 50 percent tariffs on all imports. Use the Mundell-Fleming model to illustrate graphically the short-run impact of the tariffs of the exchange rate and output in the country. 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.

Exhibit: IS*-LM* and AD ​ A small open economy with a floating exchange rate is initially in equilibrium at A with IS₁*; LM₁*. Holding all else constant, if the domestic price level increases, then the _____ curve will shift to _____.

Match -Investment function

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:

Assume that a large open economy with a floating exchange rate is described in the short run by the equations: C = 0.5 (Y - T) T = 1,000 I = 1,500 - 250r G = 1,500 NX = 1,000 - 250e C + I + G + NX = Y M/P = 0.5Y - 500r M = 1,000 CF = 500 - 250r NX = CF The last two equations specify that CF, net capital outflow, decreases with r, the interest rate, and that NX, the net exports, is equal to net capital outflow. NX is also related to the exchange rate, e, and falls when e appreciates. The price level (P) is fixed at 1.0. Calculate short-run equilibrium values of Y, r, C, I, CF, NX, e, private saving, public saving, and foreign saving. Foreign saving is defined here as minus NX. Check your work by ensuring that C + I + G = Y and private saving plus public saving plus foreign saving equals domestic investment.

If domestic prices are assumed to be endogenous in the Mundell-Fleming model, the IS curve in this model is: