Question 1

The exchange rate policy of the United States is
A)the EMS.
B)a crawling peg.
C)a float.
D)a fixed rate within a band.
E) none of the above

Accepted Answer

The exchange rate policy of the United States is a float, meaning that the value of the U.S. dollar is determined by supply and demand in the foreign exchange market. The U.S. does not fix its currency to a specific value or target a certain exchange rate range, and it is not a member of the EMS or any other fixed exchange rate system.

Question 2

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in foreign output (Y*)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 3

Assume the interest parity condition holds and that initially i = i*.A reduction in the foreign interest rate (i*)will cause
A)an increase in the demand for the domestic currency.
B)an increase in E.
C)an expected depreciation of the domestic currency.
D)all of the above

Accepted Answer

The answer of Assume the interest parity condition holds and...

Question 4

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

Accepted Answer

In a flexible exchange rate regime, an increase in the expected future exchange rate (meaning the domestic currency is expected to depreciate) makes domestic assets less attractive to foreign investors. This leads to a decrease in capital inflow or an increase in capital outflow, reducing the demand for the domestic currency. As a result, the Investment-Saving (IS) curve, often referred to here as the IP curve for consistency with the question, shifts to the right/downward due to the expected decrease in investment caused by the outflow of capital and the more expensive cost of borrowing.

Question 5

For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that
A)the exchange rate and output would both increase.
B)the exchange rate would increase and output would decrease.
C)the exchange rate would decrease.
D)the exchange rate would decrease and output would increase.
E) none of the above

Accepted Answer

A simultaneous tax increase and monetary expansion would lead to an increase in the supply of money and a decrease in the demand for money, leading to a decrease in interest rates. This decrease in interest rates would lead to a decrease in the exchange rate for a country with a flexible exchange rate regime. However, it is unclear what the effect on output would be, as it depends on various factors such as the initial level of output, the size of the tax increase, and the extent of the monetary expansion.

Question 6

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in government spending 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 7

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?
A)an appreciation of the domestic currency
B)a reduction in the exchange rate, E
C)a reduction in net exports
D)all of the above
E) none of the above

Accepted Answer

A reduction in consumer confidence leading to decreased consumption can cause an appreciation of the domestic currency. This is because lower consumption can lead to a decrease in imports, improving the current account balance and increasing demand for the domestic currency.

Question 8

In a flexible exchange rate regime,a reduction in the foreign interest rate (i*)will cause
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.

Accepted Answer

The answer of In a flexible exchange rate regime,a reduction...

Question 9

For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?
A)an increase in the domestic interest rate
B)an increase in the exchange rate
C)a reduction in net exports
D)all of the above
E) only A and C

Accepted Answer

This policy mix of increased government spending and monetary contraction typically leads to higher domestic interest rates. Higher interest rates attract foreign capital, appreciating the domestic currency (increase in the exchange rate), which in turn reduces net exports as domestic goods become more expensive for foreigners. Thus, all of the effects listed (A, B, and C) are expected outcomes, making D the correct answer.

Question 10

In a flexible exchange rate regime,a reduction in the expected future exchange rate will cause
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.

Accepted Answer

A reduction in the expected future exchange rate decreases the expected return on foreign assets, causing the IP curve to shift to the left/up as domestic currency is expected to appreciate.

Question 11

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 12

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
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

Accepted Answer

According to the interest parity condition, a reduction in the domestic interest rate will cause a reduction in the expected future exchange rate to compensate for the lower return on domestic assets. However, since the expected exchange rate is constant, the only possible adjustment is a reduction in the current exchange rate. Therefore, choice B is correct. Choices A and C are incorrect because they imply a change in the expected future exchange rate, which is assumed to be constant in the question. Choice D is also incorrect because only one of the given options is correct.

Question 13

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
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.

Accepted Answer

Under a fixed exchange rate regime, monetary policy is constrained, so fiscal policy changes like tax increases have a more pronounced effect on output. In contrast, a flexible exchange rate regime allows for monetary policy adjustments that can offset fiscal policy changes, leading to a smaller change in output.

Question 14

Contractionary monetary policy in a flexible exchange rate regime will cause
A)a shift of the IP curve.
B)a depreciation of the domestic currency.
C)an increase in E.
D)no change in E.

Accepted Answer

Contractionary monetary policy typically leads to higher interest rates, which can attract foreign capital, causing the domestic currency to appreciate, thus increasing E (the exchange rate).

Question 15

Expansionary monetary policy in a flexible exchange rate regime will cause
A)a shift of the IP curve.
B)an appreciation of the domestic currency.
C)a reduction in E.
D)no change in E.

Accepted Answer

Expansionary monetary policy typically leads to lower interest rates, which can cause the domestic currency to depreciate, leading to a reduction in the exchange rate (E).

Question 16

In a flexible exchange rate regime,an increase in the foreign interest rate (i*)will cause
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.

Accepted Answer

The answer of In a flexible exchange rate regime,an increase...

Question 17

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 18

In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause
A)an increase in output.
B)an increase in exports.
C)a reduction in the exchange rate, E.
D)all of the above
E) only A and C

Accepted Answer

Expansionary monetary policy increases the money supply, which leads to a decrease in interest rates. Lower interest rates make domestic assets less attractive, causing investors to sell domestic assets and buy foreign assets. This increases the demand for foreign currency and decreases the demand for domestic currency, leading to a depreciation of the exchange rate. The depreciation of the exchange rate makes domestic goods cheaper relative to foreign goods, increasing exports and output.

Question 19

Assume the interest parity condition holds and that initially i = i*.A reduction in the domestic interest rate will cause
A)an increase in the demand for the domestic currency.
B)a reduction in E.
C)an expected depreciation of the domestic currency.
D)all of the above

Accepted Answer

According to the interest parity condition, a reduction in domestic interest rate will decrease the return on domestic assets relative to foreign assets, causing investors to buy less of domestic assets and more of foreign assets, leading to an increase in the demand for the foreign currency, and, therefore, a depreciation of the domestic currency. This is consistent with choices A, B, and C, implying that all of the above are correct.

Question 20

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect a reduction in foreign output (Y*)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...

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

The exchange rate policy of the United States is

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Assume the interest parity condition holds and that initially i = i.A reduction in the foreign interest rate (i) will cause

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

For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that

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

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?

In a flexible exchange rate regime,a reduction in the foreign interest rate (i*) will cause

For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?

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

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.

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

Contractionary monetary policy in a flexible exchange rate regime will cause

Expansionary monetary policy in a flexible exchange rate regime will cause

In a flexible exchange rate regime,an increase in the foreign interest rate (i*) will cause

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.

In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause

Assume the interest parity condition holds and that initially i = i*.A reduction in the domestic interest rate will cause

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect a reduction in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

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

The exchange rate policy of the United States is

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Assume the interest parity condition holds and that initially i = i*.A reduction in the foreign interest rate (i*) will cause

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

For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that

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

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?

In a flexible exchange rate regime,a reduction in the foreign interest rate (i*) will cause

For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?

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

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.

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

Contractionary monetary policy in a flexible exchange rate regime will cause

Expansionary monetary policy in a flexible exchange rate regime will cause

In a flexible exchange rate regime,an increase in the foreign interest rate (i*) will cause

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.

In an open economy under flexible exchange rates,expansionary monetary policy that results in an increase in the money supply will always cause

Assume the interest parity condition holds and that initially i = i*.A reduction in the domestic interest rate will cause

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect a reduction in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Assume the interest parity condition holds and that initially i = i.A reduction in the foreign interest rate (i) will cause