Question 1

Under a floating system, the exchange rate:
A)fluctuates in response to changing economic conditions.
B)is maintained at a predetermined level by the central bank.
C)is changed at regular intervals by the central bank.
D)fluctuates in response to changes in the price of gold.

Accepted Answer

Under a floating system, the exchange rate fluctuates freely in response to changing economic conditions, such as supply and demand in the foreign exchange market. The central bank doesn't maintain a predetermined level or change the rate at regular intervals. The price of gold also doesn't directly affect the exchange rate in a floating system.

Question 2

In a small open economy with a floating exchange rate, the exchange rate will depreciate if:
A)the money supply is decreased.
B)import quotas are imposed.
C)government spending is increased.
D)taxes are decreased.

Accepted Answer

D

Question 3

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.
A)interest rate; price level price
B)level; exchange rate level of
C)output; exchange rate level of
D)output; price level

Accepted Answer

The intersection of the IS* and LM* curves in an open economy model shows the equilibrium output and exchange rate level where both the goods market and the money market are in equilibrium.

Question 4

The Mundell-Fleming model assumes that:
A)prices are flexible, whereas the IS-LM model assumes that prices are fixed.
B)prices are fixed, whereas the IS-LM model assumes that prices are flexible.
C)as in the IS-LM model, prices are fixed.
D)as in the IS-LM model, prices are flexible.

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 5

In the Mundell-Fleming model on a Y - e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:
A)the price level is held constant at the world price level p*.
B)the interest rate is held constant at the world interest rate r*.
C)the exchange rate is held constant at the world exchange rate e*.
D)output is held constant at the full employment level.

Accepted Answer

The Mundell-Fleming model assumes that the exchange rate is fixed in the short run, so option C is incorrect. While the model does assume full employment, it is not necessary to hold output constant for the IS* and LM* curves to be labeled that way, so option D is also incorrect. The IS* curve represents the equilibrium condition in the goods market, while the LM* curve represents the equilibrium condition in the money market. Both of these equilibria are affected by changes in the interest rate, so the curves are labeled IS* and LM* to remind us that the interest rate is held constant at the world interest rate. This assumption allows us to analyze the effects of changes in other exogenous variables on output and the exchange rate.

Question 6

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:
A)slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity.
B)is vertical because monetary velocity is independent of the interest rate.
C)is vertical because the exchange rate does not enter into the LM* equation.
D)slopes upward and to the right because a higher exchange rate leads to a higher income.

Accepted Answer

The LM* curve is vertical in the Mundell-Fleming model because it represents the money market equilibrium, which is not directly affected by the exchange rate.

Question 7

In the Mundell-Fleming model, the domestic interest rate is determined by the:
A)intersection of the LM and IS curves.
B)domestic rate of inflation.
C)world rate of inflation.
D)world interest rate.

Accepted Answer

The Mundell-Fleming model assumes perfect capital mobility, meaning that the domestic interest rate is equal to the world interest rate. Thus, the domestic interest rate is determined by the world interest rate, making choice (D) the correct answer. The intersection of the LM and IS curves determines output and the exchange rate in the model. Domestic inflation is not directly related to the determination of the interest rate in the Mundell-Fleming model.

Question 8

In the Mundell-Fleming model:
A)the exchange rate system must have a floating exchange rate.
B)the exchange rate system must have a fixed exchange rate.
C)it makes no difference whether the exchange rate system has a floating or a fixed exchange rate.
D)the behavior of the economy depends on whether the exchange rate system has a floating or a fixed exchange rate.

Accepted Answer

The behavior of the economy in the Mundell-Fleming model depends on whether the exchange rate system has a floating or a fixed exchange rate. In a floating exchange rate system, the exchange rate is determined by market forces, while in a fixed exchange rate system, the exchange rate is fixed by the government or central bank. The effectiveness of monetary and fiscal policy in achieving domestic macroeconomic objectives is influenced by the exchange rate regime. In a floating exchange rate system, monetary policy can be used to achieve domestic objectives, while in a fixed exchange rate system, the government may need to use fiscal policy instead.

Question 9

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:
A)the money supply is increased. the
B)money supply is decreased.
C)government spending is decreased.
D)taxes are decreased.

Accepted Answer

In a small open economy with a floating exchange rate, an increase in the money supply would lead to a depreciation of the exchange rate as the increase in the supply of the domestic currency would make it less valuable relative to foreign currencies. Conversely, a decrease in the money supply would lead to an appreciation of the exchange rate as the decrease in the supply of the domestic currency would make it more valuable relative to foreign currencies. Therefore, choice B (money supply is decreased) is the correct answer. The other choices would not have a direct impact on the exchange rate in this scenario.

Question 10

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:
A)slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market.
B)is vertical because there is only one investment level that is consistent with the world interest rate.
C)is vertical because the exchange rate does not enter into the IS* equation.
D)slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, of short-run equilibrium income in the goods market.

Accepted Answer

In the Mundell-Fleming model, the IS* curve represents the combinations of output and the exchange rate that satisfy the goods market equilibrium condition. Higher exchange rates lead to lower net exports, which reduces the level of short-run equilibrium income in the goods market. Hence, the IS* curve slopes downward and to the right.

Question 11

In the Mundell-Fleming model, the exogenous variables are the:
A)world interest rate, the price level, and the exchange rate.
B)level of government spending, taxes, and income.
C)exchange rate and level of income.
D)price level, world interest rate, monetary policy, and fiscal policy.

Accepted Answer

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

Question 12

Compared to a closed economy, an open economy is one that:
A)allows the exchange rate to float.
B)fixes the exchange rate.
C)trades with other countries.
D)does not trade with other countries.

Accepted Answer

An open economy trades with other countries, which means it engages in international trade by importing and exporting goods and services. In contrast, a closed economy does not trade with other countries and relies solely on its domestic production and consumption. The exchange rate may or may not be fixed in an open economy, depending on government policies, but allowing the exchange rate to fluctuate is a common characteristic of open economies.

Question 13

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.
A)capital inflow
B)capital outflow
C)the central bank
D)a decline in domestic saving

Accepted Answer

With perfect capital mobility, if the domestic interest rate rises above the world interest rate, investors from around the world would move capital into the country to take advantage of the higher returns, increasing the supply of loanable funds. This capital inflow would drive the domestic interest rate back down to the world level.

Question 14

In a small open economy, a decrease in its exchange rate will net exports and shift the curve.
A)increase; IS
B)decrease; IS
C)increase; LM
D)decrease; LM

Accepted Answer

A decrease in exchange rate will make exports relatively cheaper and imports relatively more expensive, which will lead to an increase in net exports. This increase in net exports will shift the IS curve to the right.

Question 15

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:
A)exchange rate is fixed.
B)exchange rate is floating.
C)domestic interest rate equals the world interest rate.
D)domestic interest rate is not equal to the world interest rate.

Accepted Answer

In a small open economy with perfect capital mobility, the domestic interest rate equals the world interest rate because the economy is too small to influence the global interest rate. Investors can freely move capital across borders to equalize interest rates, ensuring the domestic rate aligns with the world rate.

Question 16

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:
A)increase government spending.
B)increase taxes.
C)increase the money supply.
D)decrease the money supply.

Accepted Answer

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

Question 17

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:
A)income and the exchange rate will both rise.
B)the exchange rate will rise, but income will remain unchanged.
C)income will rise, but the exchange rate will remain unchanged.
D)both income and the interest rate will rise.

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 18

-In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:
A)chokes off investment, but not by as much as the new government spending.
B)chokes off an amount of investment just equal to the new government spending.
C)attracts foreign capital, thus raising the exchange rate and reducing net exports, but not by as much as the new government spending.
D)attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending.

Accepted Answer

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

Question 19

In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to:
A)decrease government spending.
B)decrease taxes.
C)increase the money supply.
D)decrease the money supply.

Accepted Answer

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

Question 20

The Mundell-Fleming model is a model for a open economy.
A)short-run; small
B)short-run; large
C)long-run; large
D)long-run; small

Accepted Answer

The Mundell-Fleming model is a short-run model that assumes a small economy that is open to international trade and capital flows.

Quiz 12: Production and Growth

Under a floating system, the exchange rate:

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

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.

The Mundell-Fleming model assumes that:

In the Mundell-Fleming model on a Y - e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:

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:

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

In the Mundell-Fleming model:

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

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

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

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, a decrease in its exchange rate will net exports and shift the curve.

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

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 adopts an expansionary fiscal policy, in the new short-run equilibrium:

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

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

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