Question 1

Under a fixed exchange rate system,at low domestic real interest rates net capital outflows are ________,so the central bank ________ foreign-exchange reserves.
A) positive; acquires
B) positive; loses
C) negative; acquires
D) negative; loses

Accepted Answer

The answer of Under a fixed exchange rate system,at low...

Question 2

What happens to the output gap,the real interest rate,and net capital flows with the occurrence of each of the following events? Assume that exchange rates are flexible.
a. The Bank of Canada increases the money supply.
b. Canadian net exports decrease due to a decrease in incomes in the United States.
c. Consumers decide to save more and spend less.
d. Expected profits from newly-built factories in Canada decrease.

Accepted Answer

The answer of What happens to the output gap,the real...

Question 3

How does the open-economy IS-MP model incorporate net exports with a floating exchange rate system?

Accepted Answer

The answer of How does the open-economy IS-MP model incorporate...

Question 4

A decrease in the real interest rate outside of Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Accepted Answer

The answer of A decrease in the real interest rate...

Question 5

Under a fixed exchange rate system,if the government decides to devalue its currency,net exports will ________ and the IS curve will shift to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right

Accepted Answer

Devaluing the currency makes exports cheaper and imports more expensive, leading to an increase in net exports. This increase in net exports shifts the IS curve to the right, indicating higher aggregate demand.

Question 6

Under a fixed exchange rate system,at high domestic real interest rates the demand for domestic currency ________,so the central bank ________ foreign-exchange reserves.
A) increases; acquires
B) increases; loses
C) decreases; acquires
D) decreases; loses

Accepted Answer

Under a fixed exchange rate system, the central bank intervenes in the foreign exchange market to maintain the fixed exchange rate. When domestic real interest rates are high, the demand for domestic currency increases as foreign investors are attracted to the higher returns. To prevent the domestic currency from appreciating, the central bank must acquire foreign-exchange reserves by selling domestic currency in the foreign exchange market.

Question 7

Among the countries that use the euro,the real exchange rate ________ and the nominal exchange rate ________.
A) is fixed; is fixed
B) is fixed; can change
C) can change; is fixed
D) can change; can change

Accepted Answer

The nominal exchange rate is fixed among eurozone countries because they all use the euro. However, the real exchange rate can change due to differences in price levels and inflation rates between these countries.

Question 8

A decrease in the real interest rate in Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Accepted Answer

A decrease in the real interest rate in Canada makes Canadian assets less attractive, leading to increased net capital outflows and causing the Canadian dollar to depreciate relative to other currencies.

Question 9

Under a fixed exchange rate system,at low domestic real interest rates the demand for domestic currency ________,so the central bank ________ foreign-exchange reserves.
A) increases; acquires
B) increases; loses
C) decreases; acquires
D) decreases; loses

Accepted Answer

Under a fixed exchange rate system, low domestic real interest rates make domestic assets less attractive, decreasing the demand for domestic currency. To maintain the fixed exchange rate, the central bank must sell foreign reserves to buy domestic currency, leading to a loss of foreign-exchange reserves.

Question 10

How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?

Accepted Answer

The answer of How does the open-economy IS-MP model incorporate...

Question 11

Under a fixed exchange rate system,a real interest rate corresponding to the upward-sloping portion of the NCF curve reflects the fact that a central bank ________,and the real interest rate corresponding to the horizontal portion of the NCF curve reflects the fact that a central bank ________.
A) can always supply more domestic currency; can always meet the demand for foreign currency
B) can always supply more domestic currency; is limited in meeting the demand for foreign currency
C) is limited in meeting the demand for domestic currency; can always meet the demand for foreign currency
D) is limited in meeting the demand for domestic currency; is limited in meeting the demand for foreign currency

Accepted Answer

Under a fixed exchange rate system, the central bank has to intervene in the foreign exchange market to maintain the fixed exchange rate. If the demand for foreign currency increases, the central bank has to supply more domestic currency to purchase foreign currency and maintain the fixed exchange rate. This implies that the real interest rate corresponding to the upward-sloping portion of the NCF curve reflects the fact that the central bank can always supply more domestic currency. However, if the demand for foreign currency exceeds the central bank's ability to supply more domestic currency, the central bank may run out of foreign reserves, leading to a potential devaluation of the domestic currency. This implies that the real interest rate corresponding to the horizontal portion of the NCF curve reflects the fact that the central bank is limited in meeting the demand for foreign currency. Therefore, option B is the best choice.

Question 12

Under a fixed exchange rate system,if the government decides to increase the fixed exchange rate,net exports will ________ and the IS curve will shift to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right

Accepted Answer

The answer of Under a fixed exchange rate system,if the...

Question 13

As countries that currently use the euro,what are the two ways that Spain and Greece could reduce the prices of their exports and of their domestic goods to remain competitive with their trading partners?

Accepted Answer

The answer of As countries that currently use the euro,what...

Question 14

Under a fixed exchange rate system,at high domestic real interest rates net capital outflows are ________,so the central bank ________ foreign-exchange reserves.
A) positive; acquires
B) positive; loses
C) negative; acquires
D) negative; loses

Accepted Answer

The answer of Under a fixed exchange rate system,at high...

Quiz 11: The Is-Mp Model: Adding Inflation and the Open Economy

Under a fixed exchange rate system,at low domestic real interest rates net capital outflows are ,so the central bank foreign-exchange reserves.

How does the open-economy IS-MP model incorporate net exports with a floating exchange rate system?

A decrease in the real interest rate outside of Canada will cause net capital outflows to and cause the dollar to relative to other currencies.

Under a fixed exchange rate system,if the government decides to devalue its currency,net exports will and the IS curve will shift to the .

Under a fixed exchange rate system,at high domestic real interest rates the demand for domestic currency ,so the central bank foreign-exchange reserves.

Among the countries that use the euro,the real exchange rate and the nominal exchange rate .

A decrease in the real interest rate in Canada will cause net capital outflows to and cause the dollar to relative to other currencies.

Under a fixed exchange rate system,at low domestic real interest rates the demand for domestic currency ,so the central bank foreign-exchange reserves.

How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?

Under a fixed exchange rate system,a real interest rate corresponding to the upward-sloping portion of the NCF curve reflects the fact that a central bank ,and the real interest rate corresponding to the horizontal portion of the NCF curve reflects the fact that a central bank .

Under a fixed exchange rate system,if the government decides to increase the fixed exchange rate,net exports will and the IS curve will shift to the .

As countries that currently use the euro,what are the two ways that Spain and Greece could reduce the prices of their exports and of their domestic goods to remain competitive with their trading partners?

Under a fixed exchange rate system,at high domestic real interest rates net capital outflows are ,so the central bank foreign-exchange reserves.