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

When a country abandons its national currency and adopts the currency of the United States, this is known as:

Suppose the government of a small open economy with a floating exchange rate imposes 50 percent tariffs on all imports. Use the Mundell-Fleming model to illustrate graphically the short-run impact of the tariffs of the exchange rate and output in the country. 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.

In a short-run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease in the interest rate and:

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM^* curve:

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

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

During periods of economic downturn, there is frequently pressure to protect domestic production from foreign competition in the belief that protectionist policies will save domestic jobs. Will protectionist policies increase or decrease domestic production in a large open economy with a floating exchange rate, holding all else constant? Illustrate your answer graphically and explain in words.

An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is called a:

Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming model to illustrate graphically the impact of an increase in the world interest rate on the exchange rate and level of output in a small open economy with a floating-exchange-rate system. 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.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS^* curve shifts to the right, raising the exchange rate:

In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:

A monetary union with a common currency is an example of a:

Briefly describe the Mundell-Fleming model .

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

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS^* curve: