Question 1

Match
-Investment function
A)  C = 5 + 0.8Y
B)  I = 60 – 6i
C)  0.3y – 20i – 160 = 0
D)  0.3y + 20i – 160 = 0

Accepted Answer

The investment function typically relates investment (I) to the interest rate (i). Option B, I = 60 – 6i, shows investment as a function of the interest rate, which is characteristic of an investment function.

Question 2

Assume that a large open economy with a floating exchange rate is described in the short run by the equations:
C = 0.5 (Y - T)
T = 1,000
I = 1,500 - 250r
G = 1,500
NX = 1,000 - 250e
C + I + G + NX = Y
M/P = 0.5Y - 500r
M = 1,000
CF = 500 - 250r
NX = CF
The last two equations specify that CF, net capital outflow, decreases with r, the interest rate, and that NX, the net exports, is equal to net capital outflow. NX is also related to the exchange rate, e, and falls when e appreciates. The price level (P) is fixed at 1.0.
Calculate short-run equilibrium values of Y, r, C, I, CF, NX, e, private saving, public saving, and foreign saving. Foreign saving is defined here as minus NX. Check your work by ensuring that C + I + G = Y and private saving plus public saving plus foreign saving equals domestic investment.

Accepted Answer

The answer of Assume that a large open economy with...

Question 3

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with floating exchange rates, lead to:
A)no change in income and net exports.
B)no change in income, but a rise in net exports.
C)a rise in income, but no change in net exports.
D)a rise in both income and net exports.

Accepted Answer

The answer of The introduction of automatic teller machines, which...

Question 4

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 5

Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2 (M / P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent. a.Using the LM curve, find the equilibrium level of Y in the small open economy, if M = 100. b.Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX? c.If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?

Accepted Answer

The answer of Assume that the LM curve for a...

Question 6

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:
A)a rise in income and net exports.
B)no change in income or net exports.
C)no change in income, but a rise in net exports.
D)a rise in income, but no change in net exports.

Accepted Answer

The answer of The introduction of automatic teller machines, which...

Question 7

Two small open economies, Fixed and Flex, can be described by the Mundell-Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime. The governments of both countries increase spending by the same amount. Compare what happens in the two countries to:
a.the exchange rate
b.equilibrium output
c.net exports.

Accepted Answer

The answer of Two small open economies, Fixed and Flex,...

Question 8

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 9

The demand for Canadian goods from other countries is likely to increase if:
A)the dollar depreciates.
B)the dollar appreciates.
C)the dollar is kept fixed.
D)None of the above.

Accepted Answer

When the Canadian dollar depreciates, Canadian goods become cheaper for foreign buyers, increasing demand.

Question 10

Suppose the government of a small open economy with a floating exchange rate imposes 50 percent tariffs on all imports. Use the Mundell-Fleming model to illustrate graphically the short-run impact of the tariffs of the exchange rate and output in the country. 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 Suppose the government of a small open...

Question 11

Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r - 200 + 2 (M / P). This IS curve is given by Y = 400 + 3G - 2T + 3NX - 200r. The function for the net exports is NX = 200 - 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r^* = 2.0 percent, and the exchange rate is initially 1.0. a.If M = 100, G = 100, and T = 100, solve for the equilibrium short-run values of Y and NX. Is the initially given exchange rate equal to the equilibrium exchange rate? b.If the Bank of Canada buys bonds in order to raise the money supply, will equilibrium Y increase?

Accepted Answer

The answer of Assume that the LM curve for a...

Question 12

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:
A)and net exports both to fall.
B)to fall while net exports are unchanged.
C)to be unchanged and net exports to fall.
D)and net exports to both be unchanged.

Accepted Answer

The answer of In the Mundell-Fleming model with a fixed...

Question 13

A member of Parliament wants to reduce the Canadian trade deficit by imposing tariffs on imports. Use a model of a small open economy with a flexible exchange rate to predict the impact of tariffs on Canadian imports, exports, net exports, the exchange rate, and the output level.

Accepted Answer

The answer of A member of Parliament wants to reduce...

Question 14

Who fixes the quantity of real money balances in closed and open economies? In a small open economy, the interest rate R is determined by what rate?

Accepted Answer

The answer of Who fixes the quantity of real money...

Question 15

Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming model to illustrate graphically the impact of an increase in the world interest rate on the exchange rate and level of output in a small open economy with a floating-exchange-rate system. 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 Economic expansion throughout the rest of the...

Question 16

During periods of economic downturn, there is frequently pressure to protect domestic production from foreign competition in the belief that protectionist policies will save domestic jobs. Will protectionist policies increase or decrease domestic production in a small open economy with a floating exchange rate, holding all else constant? Illustrate your answer graphically and explain in words.

Accepted Answer

The answer of During periods of economic downturn, there is...

Question 17

The goods produced in Canadian industries may be made more competitive in world markets by:
A)appreciating the Canadian currency.
B)depreciating the Canadian currency.
C)keeping the exchange rate fixed.
D)expanding the money supply.

Accepted Answer

Depreciating the Canadian currency makes Canadian goods cheaper for foreign buyers, thus making them more competitive in world markets.

Question 18

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:
A)a fall in income and net exports.
B)no change in income or net exports.
C)a fall in income but no change in net exports.
D)no change in income but a fall in net exports.

Accepted Answer

According to the Mundell-Fleming model with fixed exchange rates, an increase in the demand for imports will lead to a decrease in net exports, which will lead to a decrease in income. Therefore, the introduction of a stylish new line of Toyotas that make consumers prefer foreign cars over domestic cars will lead to a fall in income and net exports.

Question 19

Suppose the Minister of Finance cuts government spending in order to balance the budget. Use the Mundell-Fleming model with floating exchange rates to illustrate graphically the short-run impact of the cuts in government spending on the dollar exchange rate and output in Canada. 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 Suppose the Minister of Finance cuts government...

Question 20

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:
A)and net exports both to fall.
B)to rise and net exports to fall.
C)to fall and net exports to rise.
D)and net exports both to rise.

Accepted Answer

The answer of In the Mundell-Fleming model with a floating...

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

Match -Investment function

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead 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.

The demand for Canadian goods from other countries is likely to increase if:

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:

A member of Parliament wants to reduce the Canadian trade deficit by imposing tariffs on imports. Use a model of a small open economy with a flexible exchange rate to predict the impact of tariffs on Canadian imports, exports, net exports, the exchange rate, and the output level.

Who fixes the quantity of real money balances in closed and open economies? In a small open economy, the interest rate R is determined by what rate?

The goods produced in Canadian industries may be made more competitive in world markets by:

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

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

Match -Investment function

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead 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.

The demand for Canadian goods from other countries is likely to increase if:

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:

A member of Parliament wants to reduce the Canadian trade deficit by imposing tariffs on imports. Use a model of a small open economy with a flexible exchange rate to predict the impact of tariffs on Canadian imports, exports, net exports, the exchange rate, and the output level.

Who fixes the quantity of real money balances in closed and open economies? In a small open economy, the interest rate R is determined by what rate?

The goods produced in Canadian industries may be made more competitive in world markets by:

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

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.