Question 1

Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1)an increase in foreign output; (2)a reduction in the foreign interest rate; and (3)an increase in the domestic interest rate.

Accepted Answer

The answer of Explain what effect each of the following...

Question 2

Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a lower level.This is called

Accepted Answer

A) a devaluation. 
B) a revaluation. 
C) a depreciation. 
D) an appreciation.

Question 3

Suppose there are two countries that are identical in every way with the following exception.Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime.Suppose taxes are increased in both countries rises by the same amount.Given this information,we know that

Accepted Answer

A) the change in output in A will be greater than in B. 
B) the change in output in B will be greater than in A. 
C) the change in output will be the same in both countries. 
D) the relative output effects are ambiguous.

Question 4

Suppose a country with a fixed exchange rate decides to reduce the price of its currency.This change in policy is called

Accepted Answer

A) an appreciation. 
B) a depreciation. 
C) a peg. 
D) a devaluation. 
E)  a revaluation.

Question 5

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose a budget is passed that calls for a reduction in government spending.This reduction in government spending will cause which of the following to occur?

Accepted Answer

A) a reduction in i and an increase in E 
B) a reduction in investment 
C) no change in output 
D) no change in net exports 
E)  an increase in imports

Question 6

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that a reduction in stock market wealth causes a decrease in consumption.Which of the following will tend to occur in a fixed exchange rate regime?

Accepted Answer

A) a reduction in Y 
B) a reduction in the money supply 
C) no change in the domestic interest rate 
D) all of the above

Question 7

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause

Accepted Answer

A) a reduction in the exchange rate expected in the future. 
B) a reduction in the current exchange rate. 
C) greater depreciation of the domestic currency expected in the future. 
D) all of the above 
E)  none of the above

Question 8

In order for an individual to be indifferent between holding foreign or domestic bonds,

Accepted Answer

A) the Marshall-Lerner condition must hold. 
B) the foreign and domestic interest rates must be equal. 
C) the expected rate of depreciation of the domestic currency is zero. 
D) the interest parity condition must hold.

Question 9

A real depreciation will tend to cause

Accepted Answer

A) a reduction in exports. 
B) an increase in imports. 
C) a reduction in net exports. 
D) an increase in demand for domestic goods. 
E)  none of the above

Question 10

Under a fixed exchange rate regime,contractionary fiscal policy will tend to cause which of the following?

Accepted Answer

A) a reduction in imports 
B) a reduction in net exports 
C) an increase in investment 
D) all of the above

Question 11

In an open economy under flexible exchange rates,a reduction in the interest rate will cause a reduction in which of the following?

Accepted Answer

A) investment 
B) the exchange rate, E 
C) net exports 
D) all of the above 
E)  none of the above

Question 12

The exchange rate policy of the United States is

Accepted Answer

A) the EMS. 
B) a crawling peg. 
C) a float. 
D) a fixed rate within a band. 
E)  none of the above

Question 13

For a country pursuing a fixed exchange rate regime,what does the interest parity condition imply about domestic and foreign interest rates? Explain.

Accepted Answer

The answer of For a country pursuing a fixed exchange...

Question 14

For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that households decide to increase consumption because of,for example,an increase in consumer confidence.Given this information,we would expect which of the following to occur?

Accepted Answer

A) an increase in the domestic interest rate 
B) a reduction in E 
C) an increase in E 
D) an increase in investment 
E)  none of the above

Question 15

In a flexible exchange rate regime,an increase in the expected future exchange rate will cause

Accepted Answer

A) the IP curve to shift to the left / up. 
B) the IP curve to shift to the right / down. 
C) a movement along the IP curve. 
D) neither a shift nor movement along the IP curve.

Question 16

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect monetary contraction will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Accepted Answer

The answer of Assume the exchange rate is allowed to...

Question 17

A real appreciation will tend to cause

Accepted Answer

A) an increase in exports. 
B) a reduction in imports. 
C) an increase in net exports. 
D) a reduction in demand for domestic goods. 
E)  none of the above

Question 18

Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility.The ability of that country to move its domestic interest rate while maintaining its exchange rate will depend on

Accepted Answer

A) the degree of development of its financial markets. 
B) the degree of capital controls. 
C) the amount of foreign exchange it holds. 
D) all of the above 
E)  both A and B

Question 19

Assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that the foreign interest rate falls.Discuss what policy makers must do to maintain the pegged exchange rate.Also discuss what effect this will have on domestic output and net exports.

Accepted Answer

The answer of Assume that policy makers are pursuing a...

Question 20

To what extent can monetary policy be used to affect output in a fixed exchange rate regime? Explain.

Accepted Answer

The answer of To what extent can monetary policy be...

Exam 19: Output, the Interest Rate, and the Exchange Rate