Question 1

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

Accepted Answer

A)  chokes off investment, but not by as much as the new government spending. 
B)  chokes off an amount of investment just equal to the new government spending. 
C)  attracts foreign capital, thus raising the exchange rate and reducing net exports, but not by as much as the new government spending. 
D)  attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending.

Question 2

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

Accepted Answer

A)  running out of currency A. 
B)  running out of currency B. 
C)  generating excessive revenue from seigniorage. 
D)  ineffective fiscal policy.

Question 3

One argument favoring a fixed-exchange-rate system is that it:

Accepted Answer

A)  allows monetary policy to be used for stabilizing output and prices. 
B)  reduces exchange-rate uncertainty, thereby promoting more international trade. 
C)  leads to excessive growth of the money supply. 
D)  requires no actions on the part of the central bank to implement.

Question 4

Explain how net capital outflows change in a large open economy when there is a: a. monetary contraction
b. fiscal contraction.

Accepted Answer

The answer of Explain how net capital outflows change in...

Question 5

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

Accepted Answer

A)  arbitrageurs would sell yen in the marketplace. 
B)  arbitrageurs would buy yen from the Fed. 
C)  the money supply would fall until the market exchange rate was 100 yen per dollar. 
D)  the money supply would rise until the market exchange rate was 100 yen per dollar.

Question 6

Use the following to answer questions :
Exhibit: Risk Premium 
-(Exhibit: Risk Premium) A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ If there is an increase in the risk premium, then $L M _ { 1 } ^ { * }$  will shift to _____ and $I S _ { 1 } ^ { * }$ will shift to _____.

Accepted Answer

A)  $L M _ { 2 } ^ { * } , I S _ { 2 } ^ { * }$ 
B)  $L M _ { 2 } ^ { * } , I S _ { 3 } ^ { * }$ 
C)  $L M _ { 3 } ^ { * } , I S _ { 2 } ^ { * }$ 
D)  $L M _ { 3 } ^ { * } , I S _ { 3 } ^ { * }$

Question 7

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______.

Accepted Answer

A)  sell domestic currency to; increase 
B)  sell domestic currency to; decrease 
C)  buy domestic currency from; increase 
D)  buy domestic currency from; decrease

Question 8

In early 1994, Mexico was adhering to a fixed-exchange-rate system. Use the Mundell-Fleming model to illustrate graphically the short-run impact on the exchange rate and level of output of increased country risk caused by the Chiapas uprising and the assassination of presidential candidate Colosio. 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.

Accepted Answer

The answer of In early 1994, Mexico was adhering to...

Question 9

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

Accepted Answer

A)  live with exchange-rate volatility. 
B)  restrict its citizens from participating in 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 10

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

Accepted Answer

A)  interest rate; price level 
B)  price level; exchange rate 
C)  level of output; exchange rate 
D)  level of output; price level

Question 11

A U.S. Congressman wants to reduce the U.S. trade deficit by imposing tariffs on imports. Use a model of a large open economy with a flexible exchange rate to predict the impact of tariffs on U.S. imports, exports, net exports, the exchange rate, and the interest rate.

Accepted Answer

The answer of A U.S. Congressman wants to reduce the...

Question 12

In the Mundell-Fleming model, the domestic interest rate is determined by the:

Accepted Answer

A)  intersection of the LM and IS curves. 
B)  domestic rate of inflation. 
C)  world rate of inflation. 
D)  world interest rate.

Question 13

Use the following to answer questions :
Exhibit: IS*-LM* 
-(Exhibit: IS*-LM*) A small open economy with a fixed exchange rate e2 is initially at equilibrium A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * }$ and equilibrium output Y1. If there is a monetary expansion to $L M _ { 2 } ^ { * }$ the new equilibrium will be at ____, holding everything else constant.

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D

Question 14

The Mundell-Fleming model is a ______ model for a ______ open economy.

Accepted Answer

A)  short-run; small 
B)  short-run; large 
C)  long-run; large 
D)  long-run; small

Question 15

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

Accepted Answer

A)  decreases; left 
B)  increases; left 
C)  decreases; right 
D)  increases; right

Question 16

During the era of the gold standard, the price of gold in England:

Accepted Answer

A)  was always equal to the price of gold in the United States. 
B)  was always a little higher than the price of gold in the United States, but it could not be higher by more than the cost of transporting gold from the United States to England. 
C)  was always a little lower than the price of gold in the United States, but it could not be lower than the cost of transporting gold from England to the United States. 
D)  could be higher or lower than the price of gold in the United States, but not by more than the cost of transporting gold between the two countries.

Question 17

Use the following to answer questions :
Exhibit: IS*-LM* and AD 
-(Exhibit: IS*-LM* and AD) 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 the domestic price level decreases, then the _____ curve will shift to _____.

Accepted Answer

A)  LM1*; $L M _ { 2 } ^ { * }$ 
B)  LM1*; $L M _ { 3 } ^ { * }$ 
C)  IS1*; $I S _ { 2 } ^ { * }$ 
D)  IS1*; $I S _ { 3 } ^ { * }$

Question 18

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______.

Accepted Answer

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

Question 19

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

Accepted Answer

A)  the money supply is decreased. 
B)  import quotas are imposed. 
C)  government spending is increased. 
D)  taxes are decreased.

Question 20

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 leaves _______________ at the same level.
b. In the Mundell-Fleming model, monetary and fiscal policy depends on ________regime.

Accepted Answer

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

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

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

One argument favoring a fixed-exchange-rate system is that it:

Explain how net capital outflows change in a large open economy when there is a: a. monetary contraction b. fiscal contraction.

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to the central bank, which causes the money supply to .

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

The intersection of the IS^* and LM^* curves shows the and the at which both the goods market and the money market are in equilibrium.

A U.S. Congressman wants to reduce the U.S. trade deficit by imposing tariffs on imports. Use a model of a large open economy with a flexible exchange rate to predict the impact of tariffs on U.S. imports, exports, net exports, the exchange rate, and the interest rate.

In the Mundell-Fleming model, the domestic interest rate is determined by the:

The Mundell-Fleming model is a model for a open economy.

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate , and the LM* curve shifts to the .

During the era of the gold standard, the price of gold in England:

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to , and under flexible exchange rates expansionary fiscal policy causes income to .

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

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

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

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

One argument favoring a fixed-exchange-rate system is that it:

Explain how net capital outflows change in a large open economy when there is a: a. monetary contraction b. fiscal contraction.

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______.

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

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

A U.S. Congressman wants to reduce the U.S. trade deficit by imposing tariffs on imports. Use a model of a large open economy with a flexible exchange rate to predict the impact of tariffs on U.S. imports, exports, net exports, the exchange rate, and the interest rate.

In the Mundell-Fleming model, the domestic interest rate is determined by the:

The Mundell-Fleming model is a ______ model for a ______ open economy.

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

During the era of the gold standard, the price of gold in England:

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______.

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

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 leaves _______________ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on ________regime.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to the central bank, which causes the money supply to .

The intersection of the IS^* and LM^* curves shows the and the at which both the goods market and the money market are in equilibrium.

The Mundell-Fleming model is a model for a open economy.

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate , and the LM* curve shifts to the .

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to , and under flexible exchange rates expansionary fiscal policy causes income 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 leaves _ at the same level. b. In the Mundell-Fleming model, monetary and fiscal policy depends on __regime.