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

In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

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

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply:

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

The principal economic loss when a country dollarizes is the loss of:

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

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 ______.

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

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.

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

Suppose Congress cuts government spending in order to balance the budget. Use the Mundell-Fleming model with floating exchange rates to illustrate graphically the short-run impact of the cuts in government spending on the dollar exchange rate and output in the United States. 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.

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 large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to ______.

In a short-run model of a large open economy with a floating exchange rate:

What does the intersection of the IS and LM curves show? Which quantity do both the IS and LM models assume to be fixed?

a. You are the chief economic adviser in a small open economy with a floating-exchange-rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win reclection. Do you recommend using expansionary or contractionary monetary or fiscal policy? b. Use the Mundell-Fleming model to illustrate graphically your proposed policy. Be sure to Label: i, the azes; ii. the curves, iii. the initial equilibrium levels iv. the direction the curves shift v. the new short-run equilibrium

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

In the Mundell-Fleming model: