Exam 13: Exchange Rates, business Cycles, and Macroeconomic Policy in the Open Economy

In an open economy,an increase in foreign output would cause the IS curve to shift ________ and a decrease in the foreign real interest rate would cause the IS curve to shift ________.

If a country that fixes its exchange rate has an undervalued exchange rate,then it will ________ reserves,unless it ________ its money supply to the appropriate level.

What is purchasing power parity? Why might it not hold?

Suppose purchasing power parity holds.If the price level in the United States is 100 dollars per good and the price level in Japan is 250 yen per good,then the nominal exchange rate is ________ yen per dollar.

Monetary policy in the European Monetary Union is determined by

(a)What happens to the fundamental value of a country's exchange rate when it raises its money supply in a fixed exchange-rate system? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? (b)What happens to the fundamental value of a country's exchange rate when the foreign country raises its money supply? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? (c)So,if a country wants to maintain its official rate equal to its fundamental value,what must it do when the foreign country raises its money supply? What happens to inflation?