Deck 15: Monetary and Fiscal Policy in the Open Economy

Question 1

Assuming imperfect perfect capital mobility,the BP schedule is

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.
E)flat.

Answer 1

C

Question 2

Under perfect capital mobility and a floating exchange rate system,expansionary fiscal policy leads to

A)an increase in income and the interest rate.
B)no change in the interest rate and a fall in the trade balance.
C)no change in the interest rate and a decrease in income.
D)an increase in interest rates and a fall in the trade balance.
E)no change in interest rates and the exchange rate.

Answer 2

B

Question 3

In an open economy,there should be a

A)close positive relationship between investment and savings.
B)a close positive relationship between trade deficits and investment.
C)a negative relationship between trade deficits and savings.
D)a positive relationship between a country's savings rate and higher domestic interest rates.

Answer 3

C

Question 4

Within a fixed exchange rate system,the effect of an expansionary fiscal policy action on the balance of payments will be to

A)worsen the balance on the capital account but improve the trade balance.
B)worsen the trade balance but improve the balance on the capital account.
C)worsen both the trade balance and the balance on the capital account.
D)improve both the trade balance and the balance on the capital account.

Question 5

According to the balance of payments schedule,as the level of income rises

A)import demand increases while export demand does not.
B)export demand increases while import demand decreases.
C)both import demand and export demand increase.
D)both import demand and export demand decrease.

Question 6

Under perfect capital mobility,what would occur if the interest rate on dollar-denominated bonds amounts to 6.1 percent and the interest rate on euro-denominated bonds adjusted for changes in the exchange rate is expected to be 5.0 percent? Explain.

Question 7

Which of the following statements is (are)correct? The Mundell-Fleming model is

A)a new closed-economy model.
B)implicitly assumes a fixed domestic price level.
C)is an open-economy version of the IS-LM model.
D)Both b and c

Question 8

Assume perfect capital mobility.Under a fixed exchange rate system,expansionary fiscal policy causes the value of the dollar to _____,while expansionary monetary policy causes the value of the dollar to _____.

A)rise; rise
B)fall; fall
C)fall; rise
D)rise; fall

Question 9

Which of the following statements is (are)correct?

A)Given a fixed exchange rate system,there is an absence of conflicts between internal and external balance goals
B)Under a fixed exchange rate system,potential conflicts arise between the goals of internal balance and external balance
C)Countries may find that expansionary policies,which might be desired in order to reduce the unemployment rate,lead to income levels that are too high to balance the trade account and could lead to balance of payments problems
D)Both a and c
E)Both b and c

Question 10

A rightward shift of the BP curve occurs with a

A)fall in the exchange rate.
B)cut in taxes.
C)decrease in government spending.
D)an increase in exports.

Question 11

Suppose that the US and Europe maintain a fixed exchange rate between themselves.If inflation in the US is 3% and in Europe it is 1%,what would happen to the trade balances between these two countries? Could these countries maintain their fixed exchange rates forever? Why or why not?

Question 12

An exogenous increase in the country's trade balance shifts the

A)IS schedule to the left.
B)IS schedule to the right.
C)LM schedule to the left.
D)LM schedule to the right.

Question 13

If perfect capital mobility holds in a fixed exchange rate system,then can monetary or fiscal policy influence output? Explain.

Question 14

Given the assumptions of perfect capital mobility and a fixed exchange rate system,discuss the effects of an increase in the money supply.Provide a graph of the open economy IS-LM model to illustrate.

Question 15

In an open economy,then what is depicted by the LM,IS,and BOP curves?

Question 16

(a)You are the economics advisor of Sweden,a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility.Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit.What should happen to exchange rates in Sweden? What should happen to their trade balance?

Question 17

If exchange rates are perfectly flexible,an expansionary U.S.monetary policy will

A)increase the supply of dollars in the foreign exchange market.
B)shift the LM curve to the right.
C)reduce the demand for dollars in the foreign exchange market.
D)reduce the value of the dollar.
E)all of the above.

Question 18

The BP schedule will be steeper the

A)more responsive capital flows are to the interest rate.
B)less responsive capital flows are to the interest rate.
C)smaller the marginal propensity to import.
D)less likely an expansionary fiscal policy will lead to a balance of payments deficit.

Question 19

Under what conditions is the balance of payments schedule in the open economy IS-LM model upward sloping? Horizontal?

Question 20

Assuming perfect capital mobility and a fixed exchange rate,then an increase in government spending shifts

A)the IS schedule only.
B)both the IS and LM schedules to the left.
C)both the IS and LM schedules to the right.
D)the LM schedule to the left and the IS schedule to the right.

Question 21

From the mid 1980s to the present,the United States

A)had only a small current account deficit.
B)had a large capital account deficit,which in the balance of payments accounts was financed with a surplus in the current account,which in turn financed investment in excess of domestic saving.
C)has had a large current account deficit,which in the balance of payments accounts was financed with a surplus in the capital account,that in turn financed investment in excess of domestic saving.
D)None of the above

Question 22

Under perfect capital mobility

A)there are no restrictions on buying financial assets,though there may be on buying factories and equipment.
B)transactions costs have to be zero.
C)differential risk in assets across countries are minimal.
D)All of the above
E)None of the above

Question 23

Assuming perfect capital mobility and flexible exchange rates,then

A)monetary policy is ineffective while fiscal policy is highly effective.
B)fiscal policy is completely ineffective while monetary policy is highly effective.
C)both monetary policy and fiscal policy are effective.
D)monetary policy is less effective than fiscal policy.

Question 24

In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility,expansionary fiscal policy does all of the following EXCEPT:

A)increase interest rates.
B)increase income.
C)increase the IS curve.
D)increase inflation.

Question 25

In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility,an increase in the money supply does all of the following EXCEPT:

A)increase interest rates.
B)increase income.
C)increase the IS curve.
D)increase inflation.

Question 26

Assume perfect capital mobility and a fixed exchange rate system.Then,an increase in government spending would shift the

A)LM schedule to the left.
B)BP schedule to the right.
C)BP schedule to the left.
D)IS schedule to the right.

Question 27

In the Mundell-Fleming model,regardless of whether the economy has perfect capital mobility or not,an increase in the money supply

A)reduces interest rates .
B)increases income.
C)decreases the trade balance.
D)increases capital inflows.

Question 28

A rightward shift of the BP schedule is the result of a(n)

A)increase in the foreign interest rate.
B)decrease in the foreign interest rate.
C)exogenous fall in export demand.
D)increase in import demand.

Question 29

Under perfect capital mobility and flexible exchange rates,monetary policy works through the

A)interest rate.
B)exchange rate.
C)exports.
D)Both b and c
E)None of the above

Question 30

In the Mundell-Fleming model with perfect capital mobility,the domestic interest rates are determined by

A)monetary policy.
B)the IS and LM curves.
C)domestic savings and investment.
D)budget deficits.
E)none of the above.

Question 31

Dollarization by a foreign country is another form of:

A)balancing a country's current account.
B)maintaining monetary policy independence.
C)fixing an exchange rate.
D)maintaining a balanced government budget.

Question 32

In the Mundell-Fleming model,the exogenous variables are

A)government spending,taxes,and income.
B)the exchange rate and the price level.
C)the price level,the world interest rate,monetary policy,and fiscal policy.
D)the world interest rate,the price level,and the exchange rate.
E)none of the above.

Question 33

Assuming imperfect capital mobility and a fixed exchange rate,then an expansionary monetary policy

A)results in a balance of payments surplus without a conflict between domestic goals and external balance.
B)results in a balance of payments deficit with a potential conflict between domestic goals and external balance.
C)will shift the LM curve to the left.
D)will have no effect on the balance of payments.

Question 34

Assume perfect capital mobility.Under a fixed exchange rate system,expansionary fiscal policy causes income to _____,while under flexible exchange rates expansionary fiscal policy causes income to _____.

A)increase; increase
B)increase; remain unchanged
C)increase; decrease
D)remain unchanged; increase

Question 35

Which of the following statements is (are)correct? According to the Feldstein-Horioka Saving Investment Puzzle

A)countries with relatively low saving to income ratios have relatively high investment to income ratios.
B)there is no correlation between investment and saving in developed countries.
C)countries with a high ratio of saving to income have high ratios of investment to income.
D)Both a and b

Question 36

Under perfect capital mobility,an increase in world interest rates will

A)increase income and reduce domestic interest rates.
B)increase income.
C)increase income and lead to a balance of payment deficit.
D)increase income and lead to a balance of payment surplus.

Question 37

Empirically,there is a close positive relationship between domestic savings and investment.This is consistent with what we should expect to observe in

A)a closed economy.
B)the Mundell-Flemming model with perfect capital mobility.
C)the Mundell-Flemming model with perfect capital mobility and flexible exchange rates.
D)the Mundell-Flemming model with perfect capital mobility and fixed exchange rates.
E)none of the above.

Question 38

In an economy with perfect capital mobility,if domestic interest rates are above world interest rates then

A)capital outflows will drive domestic interest rates down.
B)capital inflows will drive domestic interest rates down.
C)current account deficits will drive domestic interest rates down.
D)the central bank will have to intervene even if exchange rates are floating.

Question 39

A depreciation of the dollar under perfect capital mobility would cause

A)the LM curve to shift to the left.
B)the LM curve to shift to the right.
C)the IS curve to shift to the right.
D)the IS curve to shift to the left.
E)the BP curve to shift up.

Question 40

In the Mundell-Fleming model,all of the following are true EXCEPT:

A)the intersection of the IS and LM curves determine the equilibrium exchange rate.
B)the BP curves position is determined by the exchange rate.
C)the policy choice between fixed and floating exchange rates shifts the BP curve.
D)the extent of capital mobility determines the slope of the BP curve.
E)all of the above are true.

Question 41

Under perfect capital mobility,monetary policy has the largest impact on the income under:

A)floating exchange rates.
B)fixed exchange rates.
C)dollarization.
D)a currency union.

Question 42

Under perfect capital mobility,fiscal policy has the largest impact on the income under:

A)fixed exchange rates.
B)floating exchange rates.
C)dollarization.
D)a currency union.

Question 43

The BP curve shifts to the left when:

A)the exchange rate falls.
B)interest rates rise.
C)income rises.
D)imports increase.

Question 44

In an open economy,there should be a close positive relationship between

A)budget deficits and interest rates.
B)trade deficits and budget deficits.
C)savings and investment.
D)investment and consumption.
E)none of the above.

Question 45

Assuming perfect perfect capital mobility,the BP schedule is

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.
E)flat.