Question 1

In an open economy, with a fixed nominal exchange rate and high capital mobility, any ____ in interest
Rates will generate ______________ .

Accepted Answer

In an open economy with a fixed nominal exchange rate and high capital mobility, a fall in interest rates makes domestic assets less attractive, leading to a capital outflow as investors seek higher returns elsewhere.

Question 2

Under a fixed exchange rate and perfect capital mobility the effect of an external shock from a change in net exports:

Accepted Answer

Under a fixed exchange rate and perfect capital mobility, an external shock from a change in net exports will cause changes in domestic money supply and inflation and the real exchange rate.

Question 3

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

Accepted Answer

The answer of Under a fixed exchange rate and perfect...

Question 4

Complete the following statement, "With a fixed exchange rate, and perfect capital mobility, the
______________ must match _________ to prevent massive capital flows and allow equilibrium in the
Foreign exchange market."

Accepted Answer

With a fixed exchange rate and perfect capital mobility, domestic interest rates must match foreign interest rates to prevent massive capital flows that could disrupt equilibrium in the foreign exchange market. This is because investors will move their capital to where they can get the highest returns, so if interest rates are higher abroad, capital will flow out of the country, and vice versa.

Question 5

If Canada were to adopt a fixed exchange rate between the Canadian and US dollars:

Accepted Answer

If Canada adopts a fixed exchange rate with the US dollar, its monetary policy would need to align with US monetary policy to maintain the fixed rate, limiting its independence.

Question 6

Under the European exchange rate system that came before the adoption of the euro:

Accepted Answer

Under the European Exchange Rate Mechanism (ERM), countries maintained fixed exchange rates with each other, but different national inflation rates sometimes necessitated adjustments to these fixed rates to maintain economic stability.

Question 7

The adoption of a ______________ exchange rate precludes the pursuit of a money supply or an inflation
Target.

Accepted Answer

A fixed exchange rate system requires the central bank to maintain the value of its currency relative to another currency, which often means sacrificing control over its domestic money supply and, by extension, its inflation targets.

Question 8

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

Accepted Answer

Under fixed exchange rates with perfect capital mobility, fiscal policy is most effective because monetary policy is constrained by the need to maintain the fixed exchange rate, and devaluation is not an option under fixed rates.

Question 9

A fixed exchange rate, plus perfect capital mobility, ________ the scope for monetary policy, and
_________ the effectiveness of fiscal policy.

Accepted Answer

Under a fixed exchange rate system with perfect capital mobility, monetary policy is largely ineffective because domestic interest rates must align with the global rates to maintain the fixed exchange rate, limiting the central bank's ability to influence the domestic economy. However, fiscal policy becomes more effective because government spending or tax changes can have a more direct impact on aggregate demand without being offset by changes in the exchange rate.

Question 10

With a _____ exchange rate, and perfect capital mobility, the domestic interest rate must _____ foreign
Interest rates to prevent massive capital flows and allow equilibrium in the foreign exchange market.

Accepted Answer

With a fixed exchange rate and perfect capital mobility, the domestic interest rate must match foreign interest rates to prevent massive capital flows and maintain equilibrium in the foreign exchange market. This is because any difference in interest rates would lead to capital flows in search of higher returns, which would put pressure on the fixed exchange rate.

Question 11

In the short run, ___________ is a powerful tool under fixed exchange rates.

Accepted Answer

In the short run, fiscal policy is a powerful tool under fixed exchange rates because it can directly influence demand without affecting the exchange rate, which is controlled by the central bank. Monetary policy effectiveness is limited as it would require changes in interest rates that could lead to capital flows affecting the fixed exchange rate.

Question 12

A country might decide to switch from flexible to fixed exchange rates:

Accepted Answer

A fixed exchange rate regime helps stabilize exchange rates, which can reduce uncertainty and volatility stemming from fluctuations in the exchange rate.

Question 13

Consider Mundell's model under fixed exchange rate and select the false statement from the following statements:

Accepted Answer

Under Mundell's model with a fixed exchange rate, monetary policy is ineffective because any increase in the money supply would lead to a balance of payments deficit, necessitating the central bank to sell foreign reserves to maintain the fixed exchange rate, thereby neutralizing the initial monetary expansion. Fiscal policy, on the other hand, is effective in influencing the economy's output.

Question 14

A ______________ of different countries is a commitment to permanently ______ exchange rates.

Accepted Answer

A monetary union of different countries is a commitment to permanently fix exchange rates. This involves countries agreeing to use a single currency or closely align their currencies, eliminating fluctuation between them.

Question 15

A monetary union of different countries is a commitment to permanently fixed _____________ .

Accepted Answer

A monetary union involves countries agreeing to use a single currency or peg their exchange rates permanently, effectively eliminating currency fluctuations among them.

Question 16

The main features of the European Monetary system were:

Accepted Answer

The European Monetary System (EMS) featured the European Currency Unit (ECU), a currency swap agreement among member countries, and the Exchange Rate Mechanism (ERM), all aimed at stabilizing exchange rates and fostering economic integration.

Question 17

Under the ERM, each country fixed ____________ against each other ERM participant. Collectively the
Group _________ against the rest of the world.

Accepted Answer

Under the European Exchange Rate Mechanism (ERM), each country fixed a nominal exchange rate against each other ERM participant, and collectively, the group floated against the rest of the world. This allowed for some stability within the group while allowing for adjustments based on broader global economic conditions.

Question 18

In 1999, the European Union (EU) introduced the euro, a currency that would eventually create a fixed exchange rate system among EU members. Which of the following effects will NOT be produced by the euro?

Accepted Answer

The introduction of the euro means that EU countries using it no longer have their own individual monetary policies but instead follow the common policy set by the European Central Bank, reducing their monetary policy flexibility.

Question 19

A speculative attack on a currency involves speculators:

Accepted Answer

Speculative attacks on a currency typically involve selling off the currency that speculators expect to depreciate in value. This is done in anticipation of making a profit from the currency's decline.

Question 20

A _____________ is a large capital outflow which if successful can cause __________ .

Accepted Answer

A speculative attack is a massive selling of a country's currency, which can lead to its devaluation if the attack is successful. This is because the supply of the currency increases significantly, potentially exceeding demand and thus lowering its value.

Quiz 12: An AD As Model of the Inflation Rate and Real GDP

In an open economy, with a fixed nominal exchange rate and high capital mobility, any in interest Rates will generate __________ .

Under a fixed exchange rate and perfect capital mobility the effect of an external shock from a change in net exports:

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

Complete the following statement, "With a fixed exchange rate, and perfect capital mobility, the ______ must match _ to prevent massive capital flows and allow equilibrium in the Foreign exchange market."

If Canada were to adopt a fixed exchange rate between the Canadian and US dollars:

Under the European exchange rate system that came before the adoption of the euro:

The adoption of a ______________ exchange rate precludes the pursuit of a money supply or an inflation Target.

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

A fixed exchange rate, plus perfect capital mobility, the scope for monetary policy, and _ the effectiveness of fiscal policy.

With a _ exchange rate, and perfect capital mobility, the domestic interest rate must _ foreign Interest rates to prevent massive capital flows and allow equilibrium in the foreign exchange market.

In the short run, ___________ is a powerful tool under fixed exchange rates.

A country might decide to switch from flexible to fixed exchange rates:

Consider Mundell's model under fixed exchange rate and select the false statement from the following statements:

A ________ of different countries is a commitment to permanently exchange rates.

A monetary union of different countries is a commitment to permanently fixed _____________ .

The main features of the European Monetary system were:

Under the ERM, each country fixed ____ against each other ERM participant. Collectively the Group _ against the rest of the world.

In 1999, the European Union (EU) introduced the euro, a currency that would eventually create a fixed exchange rate system among EU members. Which of the following effects will NOT be produced by the euro?

A speculative attack on a currency involves speculators:

A ___ is a large capital outflow which if successful can cause .

Quiz 12: An AD As Model of the Inflation Rate and Real GDP

In an open economy, with a fixed nominal exchange rate and high capital mobility, any ____ in interest Rates will generate ______________ .

Under a fixed exchange rate and perfect capital mobility the effect of an external shock from a change in net exports:

Under a fixed exchange rate and perfect capital mobility the effect of an internal shock from a change in investment:

Complete the following statement, "With a fixed exchange rate, and perfect capital mobility, the ______________ must match _________ to prevent massive capital flows and allow equilibrium in the Foreign exchange market."

If Canada were to adopt a fixed exchange rate between the Canadian and US dollars:

Under the European exchange rate system that came before the adoption of the euro:

The adoption of a ______________ exchange rate precludes the pursuit of a money supply or an inflation Target.

Under fixed exchange rates with perfect capital mobility the most effective aggregate demand management policy is:

A fixed exchange rate, plus perfect capital mobility, ________ the scope for monetary policy, and _________ the effectiveness of fiscal policy.

With a _____ exchange rate, and perfect capital mobility, the domestic interest rate must _____ foreign Interest rates to prevent massive capital flows and allow equilibrium in the foreign exchange market.

In the short run, ___________ is a powerful tool under fixed exchange rates.

A country might decide to switch from flexible to fixed exchange rates:

Consider Mundell's model under fixed exchange rate and select the false statement from the following statements:

A ______________ of different countries is a commitment to permanently ______ exchange rates.

A monetary union of different countries is a commitment to permanently fixed _____________ .

The main features of the European Monetary system were:

Under the ERM, each country fixed ____________ against each other ERM participant. Collectively the Group _________ against the rest of the world.

In 1999, the European Union (EU) introduced the euro, a currency that would eventually create a fixed exchange rate system among EU members. Which of the following effects will NOT be produced by the euro?

A speculative attack on a currency involves speculators:

A _____________ is a large capital outflow which if successful can cause __________ .

In an open economy, with a fixed nominal exchange rate and high capital mobility, any in interest Rates will generate __________ .

Complete the following statement, "With a fixed exchange rate, and perfect capital mobility, the ______ must match _ to prevent massive capital flows and allow equilibrium in the Foreign exchange market."

A fixed exchange rate, plus perfect capital mobility, the scope for monetary policy, and _ the effectiveness of fiscal policy.

With a _ exchange rate, and perfect capital mobility, the domestic interest rate must _ foreign Interest rates to prevent massive capital flows and allow equilibrium in the foreign exchange market.

A ________ of different countries is a commitment to permanently exchange rates.

Under the ERM, each country fixed ____ against each other ERM participant. Collectively the Group _ against the rest of the world.

A ___ is a large capital outflow which if successful can cause .