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

Country risk included in the risk premium in interest rates refers to the:

In the Mundell-Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports because:

Graphically illustrate and explain how a steep decline in the value of the stock market and housing prices would affect the level of domestic output, the interest rate, and the exchange rate in a large open economy with a floating exchange rate.

The "impossible trinity" refers to the idea that a country can simultaneously pursue only two of the three following policies: free international-capital flows, monetary policy for domestic stabilization, and a fixed exchange rate. For each of the following combinations indicate what the economy gives up by selecting the combination and why the omitted policy cannot be achieved: a. a fixed exchange rate and free internati onal -capital flows b. a monetary policy for domestic stabilization and a fixed exchange rate c. a monetary policy for domestic stabilization and free international-capital flows

Name the three policies that can change the equilibrium in an economy.

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

In the Mundell-Fleming model, if the price level falls, then the equilibrium income

Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2(M/P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent. a. Using the $L M$ curve, find the equilibrium level of $Y$ in the small open economy, if $M = 100$ . b. Given this value of $Y$ , if $G = 100$ and $T = 100$ , what must be the equilibrium value of $N X$ ? c. If this value of $N X$ is to be achieved, what must be the equilibrium exchange rate, $e$ ?

During the Great Depression, countries that devalued their currencies generally ______ whereas countries that maintained the old exchange rate ______.

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

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

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:

Use the following to answer questions : Exhibit: Shifting IS* and LM* -(Exhibit: Shifting IS* and LM*) 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 domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

The Mundell-Fleming model assumes that:

Under a fixed system, the exchange rate:

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

According to the Mundell-Fleming model with floating exchange rates, political uncertainty in Mexico in 1994 caused the risk premium on Mexican interest rates to ______ and the Mexican exchange rate to ______.

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

Under a floating system, the exchange rate:

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium: