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

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

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

One argument favoring a fixed-exchange-rate system is that it:

Explain how net capital outflows change in a large open economy when there is a: a. monetary contraction b. fiscal contraction.

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

Use the following to answer questions : Exhibit: Risk Premium -(Exhibit: Risk Premium) A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ If there is an increase in the risk premium, then $L M _ { 1 } ^ { * }$ will shift to _____ and $I S _ { 1 } ^ { * }$ will shift 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 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.

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

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.

A U.S. Congressman wants to reduce the U.S. trade deficit by imposing tariffs on imports. Use a model of a large open economy with a flexible exchange rate to predict the impact of tariffs on U.S. imports, exports, net exports, the exchange rate, and the interest rate.

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

Use the following to answer questions : Exhibit: IS*-LM* -(Exhibit: IS*-LM*) A small open economy with a fixed exchange rate e₂ is initially at equilibrium A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * }$ and equilibrium output Y₁. If there is a monetary expansion to $L M _ { 2 } ^ { * }$ the new equilibrium will be at ____, holding everything else constant.

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

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

During the era of the gold standard, the price of gold in England:

Use the following to answer questions : Exhibit: IS*-LM* and AD -(Exhibit: IS*-LM* and AD) A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ Holding all else constant, if the domestic price level decreases, then the _____ curve will shift to _____.

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

Fill in the blanks: a. In a closed economy, IS-LM model fiscal expansion raises _______________ whereas in a small open economy with a floating exchange rate leaves _______________ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on ________regime.