Question 1

Assuming imperfect perfect capital mobility,the BP schedule is

Accepted Answer

With imperfect capital mobility, the BP (balance of payments) schedule is upward sloping. This reflects the idea that as domestic income increases, imports increase, requiring higher interest rates to attract the necessary capital inflows to finance the resulting deficit in the current account.

Question 2

Under perfect capital mobility and a floating exchange rate system,expansionary fiscal policy leads to

Accepted Answer

Under perfect capital mobility and a floating exchange rate, expansionary fiscal policy increases income but does not change the interest rate due to capital inflows. The increased income leads to higher imports, worsening the trade balance.

Question 3

In an open economy,there should be a

Accepted Answer

C

Question 4

Within a fixed exchange rate system,the effect of an expansionary fiscal policy action on the balance of payments will be to

Accepted Answer

An expansionary fiscal policy will lead to an increase in aggregate demand, which will lead to an increase in imports and a decrease in exports, worsening the trade balance. The increase in aggregate demand will also lead to an increase in interest rates, which will attract capital inflows and improve the balance on the capital account. However, the overall effect on the balance of payments will be negative, as the worsening of the trade balance will outweigh the improvement in the balance on the capital account.

Question 5

According to the balance of payments schedule,as the level of income rises

Accepted Answer

As the level of income rises, consumers and businesses typically have more money to spend, which often leads to an increase in the demand for imported goods and services. Export demand, however, is more directly influenced by the economic conditions in other countries rather than the domestic income level.

Question 6

Under perfect capital mobility,what would occur if the interest rate on dollar-denominated bonds amounts to 6.1 percent and the interest rate on euro-denominated bonds adjusted for changes in the exchange rate is expected to be 5.0 percent? Explain.

Accepted Answer

The answer of Under perfect capital mobility,what would occur if...

Question 7

Which of the following statements is (are)correct? The Mundell-Fleming model is

Accepted Answer

The Mundell-Fleming model is an open-economy version of the IS-LM model, and it implicitly assumes a fixed domestic price level. It is not a new closed-economy model, so option A is incorrect.

Question 8

Assume perfect capital mobility.Under a fixed exchange rate system,expansionary fiscal policy causes the value of the dollar to _____,while expansionary monetary policy causes the value of the dollar to _____.

Accepted Answer

Under a fixed exchange rate system with perfect capital mobility, expansionary fiscal policy increases interest rates, attracting foreign capital and causing the dollar to rise. Expansionary monetary policy lowers interest rates, leading to capital outflows and causing the dollar to fall.

Question 9

Which of the following statements is (are)correct?

Accepted Answer

Under a fixed exchange rate system, potential conflicts arise between the goals of internal balance (low unemployment, stable inflation) and external balance (balanced trade account). Expansionary policies aimed at reducing unemployment may lead to higher incomes and therefore higher import demand, which can cause balance of payments problems.

Question 10

A rightward shift of the BP curve occurs with a

Accepted Answer

A rightward shift of the BP curve, which represents the balance of payments equilibrium, occurs when there is an increase in exports, as it improves the current account balance.

Question 11

Suppose that the US and Europe maintain a fixed exchange rate between themselves.If inflation in the US is 3% and in Europe it is 1%,what would happen to the trade balances between these two countries? Could these countries maintain their fixed exchange rates forever? Why or why not?

Accepted Answer

The answer of Suppose that the US and Europe maintain...

Question 12

An exogenous increase in the country's trade balance shifts the

Accepted Answer

An exogenous increase in the country's trade balance means that its exports have exceeded its imports, leading to an increase in net exports. This increase in net exports directly increases aggregate demand, shifting the IS schedule to the right.

Question 13

If perfect capital mobility holds in a fixed exchange rate system,then can monetary or fiscal policy influence output? Explain.

Accepted Answer

The answer of If perfect capital mobility holds in a...

Question 14

Given the assumptions of perfect capital mobility and a fixed exchange rate system,discuss the effects of an increase in the money supply.Provide a graph of the open economy IS-LM model to illustrate.

Accepted Answer

The answer of Given the assumptions of perfect capital mobility...

Question 15

In an open economy,then what is depicted by the LM,IS,and BOP curves?

Accepted Answer

The answer of In an open economy,then what is depicted...

Question 16

(a)You are the economics advisor of Sweden,a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility.Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit.What should happen to exchange rates in Sweden? What should happen to their trade balance?

Accepted Answer

The answer of (a)You are the economics advisor of Sweden,a...

Question 17

If exchange rates are perfectly flexible,an expansionary U.S.monetary policy will

Accepted Answer

If exchange rates are perfectly flexible, an expansionary U.S. monetary policy will increase the supply of dollars in the foreign exchange market, which, in turn, will reduce the demand for dollars and reduce the value of the dollar. This will shift the LM curve to the right, leading to an increase in output, employment, and prices in the short run.

Question 18

The BP schedule will be steeper the

Accepted Answer

If capital flows are less responsive to the interest rate, then changes in the interest rate will have less impact on the overall balance of payments. This means that the BP schedule will need to be steeper in order to achieve the same level of adjustment in response to a given change in the interest rate.

Question 19

Under what conditions is the balance of payments schedule in the open economy IS-LM model upward sloping? Horizontal?

Accepted Answer

The answer of Under what conditions is the balance of...

Question 20

Assuming perfect capital mobility and a fixed exchange rate,then an increase in government spending shifts

Accepted Answer

An increase in government spending will increase demand for goods and services, shifting the IS schedule to the right. This will raise the interest rate and cause an inflow of capital into the economy, putting upward pressure on the exchange rate. To maintain the fixed exchange rate, the central bank must buy up foreign currency, which increases the money supply and shifts the LM schedule to the right. Therefore, both the IS and LM schedules shift to the right.

Quiz 15: Monetary and Fiscal Policy in the Open Economy