Question 1

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

In a small open economy with a floating exchange rate, a rise in government spending will lead to an increase in aggregate demand. This will cause the real exchange rate to appreciate, making domestic goods more expensive relative to foreign goods. As a result, net exports will fall. The interest rate will not change, as the central bank will accommodate the increase in aggregate demand by increasing the supply of money.

Question 2

Use the following to answer questions :
Exhibit: Shifting IS* and LM* 
-(Exhibit: Shifting IS* and LM*) 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 domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Question 3

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

Accepted Answer

When the government decreases the money supply in a small open economy with a floating exchange rate, interest rates rise to balance the money market. Higher interest rates attract foreign capital, appreciating the domestic currency (exchange rate rises). The more expensive domestic currency reduces exports and increases imports, leading to a fall in net exports and thus a decrease in aggregate demand and income.

Question 4

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

Accepted Answer

The gold standard facilitated a fixed exchange rate system, where the value of currencies was pegged to a specific amount of gold. This system inherently limited the difference in gold prices between countries like England and the United States to the cost of transporting gold between them. If the price difference exceeded transportation costs, it would be profitable to buy gold in one country and sell it in the other, thus arbitraging the price difference until it fell to the transportation cost or below.

Question 5

If there is a fixed-exchange-rate system, then in the long run:

Accepted Answer

In a fixed-exchange-rate system, the nominal exchange rate is set by the government or central bank and does not change, or changes only within very narrow boundaries. However, the real exchange rate, which adjusts the nominal rate by the relative price levels between countries, can vary due to changes in inflation rates, productivity, and other economic factors.

Question 6

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

Accepted Answer

If the exchange rate falls below the fixed level, it means the value of the domestic currency is decreasing and the foreign currency is gaining value. To maintain the fixed exchange rate, the central bank will sell foreign currency from its reserves to increase demand for the domestic currency and prop up its value. This is done to maintain the exchange rate at the fixed level. Therefore, option B, selling foreign currency from reserves, is the correct choice.

Question 7

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium the money supply:

Accepted Answer

In a small open economy with a fixed exchange rate, an increase in government purchases will increase the demand for goods and services, leading to an increase in income. However, since the exchange rate is fixed, the increase in income leads to an increase in demand for foreign currency, causing the domestic currency to depreciate. To prevent this depreciation, the central bank must increase the money supply by buying domestic currency and selling foreign currency, thus keeping the exchange rate fixed. This increase in the money supply will further augment the effect of government spending on income. Therefore, choice A is the correct answer.

Question 8

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

Accepted Answer

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

Question 9

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

Accepted Answer

An increase in government purchases will increase aggregate demand in the short run, leading to an increase in output/income. However, since the economy has a fixed exchange rate, there will be an increase in demand for the currency, which will lead to an appreciation of the currency. This appreciation of the currency will make exports more expensive and imports cheaper, which will lead to a decrease in net exports and partially offset the initial increase in aggregate demand. Therefore, income will rise but the exchange rate does not rise.

Question 10

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

The answer of If the Fed announced it would fix...

Question 11

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

Accepted Answer

Decreasing taxes increases disposable income, leading to higher consumption and investment, which can boost equilibrium output in a small open economy with a fixed exchange rate.

Question 12

Use the following to answer questions :
Exhibit: Shifting IS* and LM* 
-(Exhibit: Shifting IS* and LM*) 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 government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

Accepted Answer

Imposing a tariff on imports reduces the demand for foreign currency to pay for those imports, which appreciates the domestic currency, making exports more expensive and imports cheaper, despite the tariff. This reduces net exports, shifting the IS* curve to the left to $I S _ { 2 } ^ { * * }$.

Question 13

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS^* curve shifts to the right, raising the exchange rate:

Accepted Answer

In a small open economy with a floating exchange rate, imposing an import quota initially reduces imports, which could increase demand for domestic goods. However, the exchange rate would adjust (appreciate) to offset this, making exports more expensive and imports cheaper again, thus neutralizing the effect on net exports and income. The adjustment in the exchange rate does not lead to an increase in net exports or income in the short run.

Question 14

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

In a small open economy with a floating exchange rate, an increase in the money supply leads to a depreciation of the exchange rate, making exports cheaper and imports more expensive. This results in an increase in net exports.

Question 15

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

Accepted Answer

According to the Mundell-Fleming model, if the Federal Reserve cannot alter domestic interest rates, the only channel through which changes in the money supply can affect the economy is the exchange rate. An increase in the money supply will lead to a depreciation of the currency, making exports cheaper and imports more expensive, which in turn will stimulate net exports and aggregate demand. Conversely, a decrease in the money supply will appreciate the currency, making exports more expensive and imports cheaper, which will reduce net exports and aggregate demand.

Question 16

Use the following to answer questions : Exhibit: IS*-LM* -(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

An increase in government spending will shift the IS curve to the right, causing the new equilibrium to be at point B. The increase in government spending will increase output and cause an increase in the interest rate, which in turn will cause the exchange rate to appreciate. The new equilibrium is at point B where the IS curve intersects the LM curve at the new higher interest rate and the new higher exchange rate.

Question 17

Use the following to answer questions : Exhibit: IS*-LM* -(Exhibit: IS*-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * }$ equilibrium exchange rate e₂, 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

The answer of Use the following to answer questions :
Exhibit:...

Question 18

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:

Accepted Answer

In a fixed-exchange-rate system, the nominal exchange rate is fixed by government intervention. The real exchange rate, which measures the relative prices of goods and services between two countries, is also fixed in the short run because the nominal exchange rate is fixed.

Question 19

Under a fixed-exchange-rate system, the central bank of a small open economy must:

Accepted Answer

Under a fixed-exchange-rate system, the central bank must ensure that the equilibrium exchange rate equals the announced exchange rate. This can be achieved by allowing the money supply to adjust to whatever level is necessary. Additionally, options A and B are not correct because the central bank cannot print foreign currency and does not need to have a reserve of its own currency to maintain the fixed exchange rate. Option D is also not correct because there are different rules that can be followed under a fixed exchange rate system, and a constant growth rate for the money supply may not be appropriate in all circumstances.

Question 20

Under a fixed system, the exchange rate:

Accepted Answer

Under a fixed system, the exchange rate is maintained at a predetermined level by the central bank. This means that the central bank will buy or sell its own currency in order to keep the exchange rate within a certain range. This is different from a floating exchange rate system where the value of the currency is determined by the market forces of supply and demand.

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

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

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

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

If there is a fixed-exchange-rate system, then in the long run:

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium the money supply:

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

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

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate:

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:

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:

Under a fixed-exchange-rate system, the central bank of a small open economy must:

Under a fixed system, the exchange rate:

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS^* curve shifts to the right, raising the exchange rate: