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

In which situation will an increase in money supply have no effect on equilibrium effect?

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

In the Mundell-Fleming model, the exogenous variables are the:

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

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:

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. (Hint: As in the appendix to textbook Chapter 13, form the IS curve from C + I + G + NX = Y, and then substitute CF for NX to get C + I + G + CF = Y. Combine with the LM curve and solve for Y, r, and CF and then use NX = CF to get NX and the equation relating NX to e to get e.)

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?

Match the formula in List A with its title in List B.

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

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-tun values of $Y$ and $N X$ . Is the initially given exchange rate equal to the equilibrium exchange rate? b. If the Fed buys bonds in order to raise the money supply, will equilibrium $Y$ increase?

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

Two small open economies, Fixed and Flex, can be described by the Mundell-Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime. The governments of both countries increase spending by the same amount. Compare what happens in the two countries to: a. the exchange rate b. equilibrium output c. net exports.

Under a fixed-exchange-rate system, the central bank of a small open economy must:

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to ______ and expansionary monetary policy causes the exchange rate 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:

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

If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model: