Question 1

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with equilibrium exchange rate e₂, and equilibrium output Y₁. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

Accepted Answer

D

Question 2

In the Mundell-Fleming model:

Accepted Answer

The Mundell-Fleming model shows that the behavior of an open economy is influenced by whether it has a floating or fixed exchange rate, affecting monetary and fiscal policy effectiveness.

Question 3

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

Accepted Answer

The Mundell-Fleming model is designed for short-run analysis and is typically applied to small open economies. It extends the IS-LM model to include international trade and capital flows.

Question 4

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

Accepted Answer

An open economy is one that engages in international trade, meaning it trades goods and services with other countries. This is in contrast to a closed economy, which does not engage in international trade. The exchange rate regime (floating or fixed) is not directly related to whether an economy is open or closed.

Question 5

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

Accepted Answer

A decrease in the exchange rate makes exports cheaper relative to imports, leading to an increase in net exports. This increase in net exports would shift the IS curve to the right, increasing output and interest rates.

Question 6

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with IS*₁, LM*₁, equilibrium exchange rate e₂, and equilibrium output Y₁. If there is an increase in government spending to IS*₂, the new equilibrium will be at _____, holding everything else constant.

Accepted Answer

The answer of Exhibit: IS*-LM*  A small open economy...

Question 7

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _____ would drive the domestic interest rate back to the level of the world interest rate.

Accepted Answer

In a small open economy with perfect capital mobility, capital inflow would drive the domestic interest rate back to the level of the world interest rate. This is because investors would find it more profitable to invest in the domestic economy, leading to an increase in demand for the domestic currency and, therefore, an increase in its value. This, in turn, would lead to a decrease in the domestic interest rate as the increased supply of loanable funds would drive down its price (interest rate).

Question 8

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

An expansionary fiscal policy will increase government spending and/or reduce taxes, leading to an increase in aggregate demand. In a small open economy with a floating exchange rate, the increase in demand will lead to an appreciation of the currency. This appreciation of the exchange rate will make exports more expensive and imports cheaper, reducing net exports and partially offsetting the expansionary fiscal policy. Therefore, while the exchange rate will rise, income will remain unchanged. Note that this is in the short run, and in the long run, the exchange rate may return to its original level, and income may increase.

Question 9

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

Accepted Answer

The answer of In a small open economy with a...

Question 10

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

The answer of In a small open economy with a...

Question 11

In the Mundell-Fleming model, the exogenous variables are the:

Accepted Answer

The answer of In the Mundell-Fleming model, the exogenous variables...

Question 12

Under a floating system, the exchange rate:

Accepted Answer

Under a floating exchange rate system, the exchange rate is determined by market forces of supply and demand. Therefore, the exchange rate will fluctuate in response to changing economic conditions, such as changes in inflation rates, interest rates, or political events.

Question 13

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

Accepted Answer

When the money supply is decreased, it will decrease the demand for local currency, leading to an appreciation of the exchange rate. A decrease in government spending or an increase in taxes will both lead to a decrease in aggregate demand, which may lead to a decrease in money supply or an increase in savings, but will not directly affect the exchange rate. Therefore, the correct option is B.

Question 14

In a small open economy with a floating exchange rate, the supply of real money balances is fixed, and a rise in government spending:

Accepted Answer

The answer of In a small open economy with a...

Question 15

The Mundell-Fleming model assumes that:

Accepted Answer

The Mundell-Fleming model, like the IS-LM model, assumes that prices are fixed. This assumption allows the model to focus on the short-term effects of fiscal and monetary policy in an open economy.

Question 16

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

Accepted Answer

In the Mundell-Fleming model, the domestic interest rate is determined by the world interest rate, as capital is assumed to be mobile and flows freely between countries in search of higher returns. Therefore, choice D, world interest rate, is the correct answer. Choices A, B, and C are incorrect, as they do not directly determine the domestic interest rate in the model.

Question 17

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:

Accepted Answer

The LMS curve, representing the liquidity preference and money supply in the Mundell-Fleming model, is vertical because it reflects situations where the money supply is fixed by the central bank, and thus, the exchange rate does not directly affect it.

Question 18

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

The answer of The intersection of the IS^* and LM^*...

Question 19

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:

Accepted Answer

The IS^* curve represents the equilibrium condition in the goods market, where net exports depend on the exchange rate. As the exchange rate increases (moves up along the vertical axis), net exports decrease, leading to a lower level of short-run equilibrium income in the goods market (moves down along the horizontal axis). Therefore, the curve slopes downward and to the right.

Question 20

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

Accepted Answer

The answer of In a small open economy with a...

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

Exhibit: IS-LM A small open economy with a floating exchange rate is initially at equilibrium A with equilibrium exchange rate e₂, and equilibrium output Y₁. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

In the Mundell-Fleming model:

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

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

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

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _____ would drive the domestic interest rate back to the level of the world interest rate.

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

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:

In the Mundell-Fleming model, the exogenous variables are the:

Under a floating system, the exchange rate:

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

In a small open economy with a floating exchange rate, the supply of real money balances is fixed, and a rise in government spending:

The Mundell-Fleming model assumes that:

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

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:

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.

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:

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

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

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

In the Mundell-Fleming model:

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

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

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

Exhibit: IS*-LM* A small open economy with a floating exchange rate is initially at equilibrium A with IS*1, LM*1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS*2, the new equilibrium will be at _____, holding everything else constant.

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _____ would drive the domestic interest rate back to the level of the world interest rate.

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

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:

In the Mundell-Fleming model, the exogenous variables are the:

Under a floating system, the exchange rate:

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

In a small open economy with a floating exchange rate, the supply of real money balances is fixed, and a rise in government spending:

The Mundell-Fleming model assumes that:

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

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:

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.

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:

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

Exhibit: IS-LM A small open economy with a floating exchange rate is initially at equilibrium A with equilibrium exchange rate e₂, and equilibrium output Y₁. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

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

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

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:

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.

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: