Question 1

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on:
a. domestic investment.
b. domestic output.

Accepted Answer

a.Since the world interest rate does not change, domestic investment will not change in the small open economy, but the domestic interest rate will decrease in the large open economy, which will increase domestic investment.
b.The monetary expansion increases domestic output in both economies, but through different pathways. In the small open economy, the monetary expansion will reduce the exchange rate, increasing domestic output via an increase in net exports (and induced consumption spending through the increase in income). In the large open, economy, output increases not only because of the increase in net exports, but the monetary expansion also reduces the domestic interest rate and increases domestic investment.

Question 2

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

Accepted Answer

A)  interest rate falls and the level of investment rises.
B)  exchange rate falls and net exports increase.
C)  interest rate falls but the level of investment does not rise.
D)  exchange rate falls but net exports do not increase. B

Question 3

Compare the effects of an import quota on output under:
a.a flexible exchange rate.
b.a fixed exchange rate.

Accepted Answer

a.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right. Since the LM curve is vertical, the exchange rate appreciates, but output remains unchanged.
b.The import quota leads to a fall in imports. Because net exports equal exports minus imports, net exports increase, shifting the IS curve to the right, leading to an increase in the interest rates and, hence, putting pressure on the exchange rate to appreciate. To keep the exchange rate fixed, the central bank has to increase the money supply causing a rightward shift in the LM curve and an increase in output.
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Question 4

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

Accepted Answer

A)  The government has a budget surplus.
B)  The government has a budget deficit.
C)  The central bank's foreign-currency reserves are increasing.
D)  The central bank's foreign-currency reserves are decreasing.

Question 5

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 IS-LM model, fiscal expansion leaves _____ at the same level.
b. In the Mundell-Fleming model, monetary and fiscal policy depends on the _____regime.

Accepted Answer

The answer of Fill in the blanks:
a. In a closed...

Question 6

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

Accepted Answer

A)  increased.
B)  decreased.
C)  allowed to float.
D)  kept fixed within a band.

Question 7

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

Accepted Answer

A)  live with exchange-rate volatility.
B)  control its citizens' access to world financial markets.
C)  give up the use of monetary policy for purposes of domestic stabilization.
D)  give up the use of fiscal policy for purposes of domestic stabilization.

Question 8

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _____ increase income, and under fixed exchange rates, expansionary monetary policy _____ increase income.

Accepted Answer

A)  can; can
B)  can; cannot
C)  cannot; can
D)  cannot; cannot

Question 9

In the Mundell-Fleming model:

Accepted Answer

A)  the exchange-rate system must have a floating exchange rate.
B)  the exchange-rate system must have a fixed exchange rate.
C)  it makes no difference whether the exchange-rate system has a floating or a fixed exchange rate.
D)  the behaviour of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate.

Question 10

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

Accepted Answer

A)  exchange rate.
B)  price level.
C)  level of government spending.
D)  tax rates.

Question 11

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

Accepted Answer

A)  the exchange rate rises, but income does not rise.
B)  income rises, but the exchange rate does not rise.
C)  both income and the exchange rate rise.
D)  neither income nor the exchange rate rises, as the money supply contracts.

Question 12

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

Accepted Answer

A)  a fall in the level of output and an increase in the consumer price index.
B)  a fall in the level of output and a decrease in the consumer price index.
C)  an increase in the level of output and a decrease in the consumer price index.
D)  an increase in the level of output and an increase in the consumer price index.

Question 13

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

Accepted Answer

A)  increase; IS
B)  decrease; IS
C)  increase; LM
D)  decrease; LM

Question 14

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _____, and in an economy with fixed exchange rates, import restrictions cause net exports to _____.

Accepted Answer

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

Question 15

Compared to a closed economy, an open economy is one that:

Accepted Answer

A)  allows the exchange rate to float.
B)  fixes the exchange rate.
C)  trades with other countries.
D)  does not trade with other countries.

Question 16

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

Accepted Answer

A)  decrease in the money supply
B)  increase in the money supply
C)  decrease in government spending
D)  fall in the price level

Question 17

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

Accepted Answer

A)  income and the exchange rate will both rise.
B)  the exchange rate will rise, but income will remain unchanged.
C)  income will rise, but the exchange rate will remain unchanged.
D)  both income and the interest rate will rise.

Question 18

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

Accepted Answer

A)  higher than
B)  lower than
C)  equal to
D)  fixed relative to

Question 19

Exhibit: Shifting IS* and LM*  A small open economy with a floating exchange rate is initially in equilibrium at A with  Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

Accepted Answer

A)  LM1*; LM2*
B)  LM1*; LM3*
C)  IS1*; IS2*
D)  IS1*; IS3*

Question 20

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

Accepted Answer

A)  increase in the present.
B)  decrease in the present.
C)  remain constant in the present.
D)  decrease only in the future.

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

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on: a. domestic investment. b. domestic output.

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

Compare the effects of an import quota on output under: a.a flexible exchange rate. b.a fixed exchange rate.

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

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 IS-LM model, fiscal expansion leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the ___regime.

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

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

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _ increase income, and under fixed exchange rates, expansionary monetary policy _ increase income.

In the Mundell-Fleming model:

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

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _, and in an economy with fixed exchange rates, import restrictions cause net exports to _.

Compared to a closed economy, an open economy is one that:

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

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

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _ curve will shift to _.

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

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

Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a floating exchange rate and in a large open economy with a floating exchange rate on: a. domestic investment. b. domestic output.

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

Compare the effects of an import quota on output under: a.a flexible exchange rate. b.a fixed exchange rate.

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

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 IS-LM model, fiscal expansion leaves _____ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the _____regime.

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

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

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _____ increase income, and under fixed exchange rates, expansionary monetary policy _____ increase income.

In the Mundell-Fleming model:

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

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

If the exchange rate is allowed to have a direct effect on the consumer price index, under a flexible exchange rate a fall in government spending causes:

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _____, and in an economy with fixed exchange rates, import restrictions cause net exports to _____.

Compared to a closed economy, an open economy is one that:

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) _____ sufficient to offset the decline in the demand for money caused by the higher risk premium.

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

In order to compensate for an expected future decline in the Japanese yen relative to the dollar, the interest rate in Japan must be _____ the interest rate in Canada.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

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

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 IS-LM model, fiscal expansion leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on the ___regime.

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy _ increase income, and under fixed exchange rates, expansionary monetary policy _ increase income.

In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to _, and in an economy with fixed exchange rates, import restrictions cause net exports to _.

Exhibit: Shifting IS* and LM* A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _ curve will shift to _.