12 PDF

Pool Canvas
http://cp03.coursecompass.com/webapps/assessment/do/authoring/view...
COURSES > ACCE > CONTROL PANEL > POOL MANAGER > POOL CANVAS
Pool Canvas
Add, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation
Settings to establish which default options, such as feedback and images, are available for question creation.
Add
Creation Settings
Name
Testbank Chapter 12: The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime
Description Question pool for Testbank Chapter 12: The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate
Regime
Instructions
Add Question Here
Multiple Choice
0 points
Question
Compared to a closed economy, an open economy is one that:
Answer
allows the exchange rate to float.

fixes the exchange rate.
trades with other countries.
does not trade with other countries.
Add Question Here
Multiple Choice
0 points
Question
The Mundell-Fleming model assumes that:
Answer
prices are flexible, whereas the ISLM model assumes that prices are fixed.
prices are fixed, whereas the ISLM model assumes that prices are flexible.
as in the ISLM model, prices are fixed.
as in the ISLM model, prices are flexible.
Add Question Here
Multiple Choice
0 points
Question
The Mundell-Fleming model is a ______ model for a ______ open economy.
Answer
short-run; small
short-run; large
long-run; large
long-run; small
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model:
Answer
the exchange rate system must have a floating exchange rate.

the exchange rate system must have a fixed exchange rate.
it makes no difference whether the exchange rate system has a floating or a fixed exchange rate.
the behavior of the economy depends on whether the exchange rate system has a floating or a fixed
exchange rate.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, the domestic interest rate is determined by the:
1 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
intersection of the LM and IS curves.

domestic rate of inflation.
world rate of inflation.
world interest rate.
Add Question Here
Multiple Choice
0 points
Question
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.
Answer
capital inflow
capital outflow
the central bank
a decline in domestic saving
Add Question Here
Multiple Choice
0 points
Question
Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which
the:
Answer
exchange rate is fixed.

exchange rate is floating.
domestic interest rate equals the world interest rate.
domestic interest rate is not equal to the world interest rate.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy, a decrease in its exchange rate will ______ net exports and shift the _____ curve.
Answer
increase; IS
decrease; IS
increase; LM
decrease; LM
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
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.
is vertical because there is only one investment level that is consistent with the world interest rate.
is vertical because the exchange rate does not enter into the IS* equation.
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.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model on a Y e graph, the curves labeled IS* and LM* are labeled that way as a reminder
that:
Answer
the price level is held constant at the world price level p*.
the interest rate is held constant at the world interest rate r*.
the exchange rate is held constant at the world exchange rate e*.
2 of 30
6/1/2012 8:52 PM
Pool Canvas
output is held constant at the full employment level.

Add Question Here
Multiple Choice
0 points
Question
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:
Answer
slopes upward and to the right because at a higher income a higher interest rate is needed to increase
velocity.
is vertical because monetary velocity is independent of the interest rate.
is vertical because the exchange rate does not enter into the LM* equation.
slopes upward and to the right because a higher exchange rate leads to a higher income.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, the exogenous variables are the:
Answer
world interest rate, the price level, and the exchange rate.
level of government spending, taxes, and income.
exchange rate and level of income.
price level, world interest rate, monetary policy, and fiscal policy.
Add Question Here
Multiple Choice
0 points
Question
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.
Answer
interest rate; price level

price level; exchange rate
level of output; exchange rate
level of output; price level
Add Question Here
Multiple Choice
0 points
Question
Under a floating system, the exchange rate:
Answer
fluctuates in response to changing economic conditions.

is maintained at a predetermined level by the central bank.
is changed at regular intervals by the central bank.
fluctuates in response to changes in the price of gold.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:
Answer
increase government spending.

increase taxes.
increase the money supply.
decrease the money supply.
Add Question Here
Multiple Choice
3 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to:
Answer
decrease government spending.

decrease taxes.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, the exchange rate will appreciate if:
Answer
the money supply is increased.

the money supply is decreased.
government spending is decreased.
taxes are decreased.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, the exchange rate will depreciate if:
Answer
the money supply is decreased.

import quotas are imposed.
government spending is increased.
taxes are decreased.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the
new short-run equilibrium:
Answer
income and the exchange rate will both rise.

the exchange rate will rise, but income will remain unchanged.
income will rise, but the exchange rate will remain unchanged.
both income and the interest rate will rise.
Add Question Here
Multiple Choice
0 points
Question
-In a small open economy with a floating exchange rate, a rise in government spending in the new short-run
equilibrium:
Answer
chokes off investment, but not by as much as the new government spending.
chokes off an amount of investment just equal to the new government spending.
attracts foreign capital, thus raising the exchange rate and reducing net exports, but not by as much as the
new government spending.
attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to
the new government spending.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in
government spending:
Answer
raises the interest rate, so that income must rise to maintain equilibrium in the money market.
raises the interest rate so that net exports must fall to maintain equilibrium in the goods market.
4 of 30
6/1/2012 8:52 PM
Pool Canvas
cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.
cannot change the interest rate so income must rise to maintain equilibrium in the money market.
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-1
(Exhibit: IS*LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS* , LM* ,
1
equilibrium exchange rate e , and equilibrium output Y . If there is an increase in government spending to IS* , the
2
new equilibrium will be at ______, holding everything else constant.

Answer
A
B
C
D
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-1
(Exhibit: IS*LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS* , LM* ,
1
equilibrium exchange rate e , and equilibrium output Y . If there is a monetary expansion to LM* , the new equilibrium
2
will be at ______, holding everything else constant.

Answer
A
B
C
5 of 30
6/1/2012 8:52 PM
Pool Canvas
6 of 30
D
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new
short-run equilibrium:
Answer
income falls and the exchange rate rises.

the exchange rate falls and income rises.
income remains unchanged but the exchange rate rises.
the exchange rate remains unchanged but income falls.
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
interest rate falls and the level of investment rises.

exchange rate falls and net exports increase.
interest rate falls but the level of investment does not rise.
exchange rate falls but net exports do not increase.
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
exchange rate.
price level.
level of government spending.
tax rates.
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
but not raising net exports or income.

and net exports but not income.
and income but not net exports.
net exports and income.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the
Answer
imports will decrease while exports remain constant, leading to a rise in net exports.
imports will decrease and exports will increase, leading to a rise in net exports.
imports will decrease and exports will decrease by an equal amount.
both imports and exports will remain unchanged.
Add Question Here
6/1/2012 8:52 PM
Pool Canvas
Multiple Choice
0 points
Question
Reference: Ref 12-2
(Exhibit: Risk Premium) A small open economy with a floating exchange rate is initially in equilibrium at A with IS* ,
1
LM*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 ______.
Answer
LM*; LM*2
LM*; LM*3
IS*; IS*2
IS*; IS*3
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-2
1
LM*1. Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the
_____ curve will shift to _____.
Answer
LM*; LM*2
LM*; LM*3
IS*; IS*2
IS*; IS*3
7 of 30
6/1/2012 8:52 PM
Pool Canvas
Add Question Here

Multiple Choice
0 points
Question
Under a fixed system, the exchange rate:
Answer
fluctuates in response to changing economic conditions.

is maintained at a predetermined level by the central bank.
is changed at regular intervals by the central bank.
fluctuates in response to changes in the price of gold.
Add Question Here
Multiple Choice
0 points
Question
To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the
central bank must:
Answer
buy foreign currency.

sell foreign currency from reserves.
raise taxes.
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
arbitrageurs would sell yen in the marketplace.

arbitrageurs would buy yen from the Fed.
the money supply would fall until the market exchange rate was 100 yen per dollar.
the money supply would rise until the market exchange rate was 100 yen per dollar.
Add Question Here
Multiple Choice
0 points
Question
Under a fixed-exchange-rate system, the central bank of a small open economy must:
Answer
have a reserve of its own currency, which it must have accumulated in past transactions.
have a reserve of foreign currency, which it can print.
allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals
the announced exchange rate.
follow a rule specifying a constant growth rate for the money supply.
Add Question Here
Multiple Choice
0 points
Question
If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:
Answer
the nominal exchange rate is fixed, but the real exchange rate is free to vary.
the real exchange rate is fixed, but the nominal exchange rate is free to vary.
both the nominal and real exchange rates are fixed.
the nominal exchange rate is fixed, but whether the real exchange rate is fixed depends on whether the
central bank follows a rule of constant growth of the money supply.
Add Question Here
Multiple Choice
0 points
Question
If there is a fixed-exchange-rate system, then in the long run:
8 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
the nominal exchange rate is fixed, but the real exchange rate is free to vary.
the real exchange rate is fixed, but the nominal exchange rate is free to vary.
both the nominal and real exchange rates are fixed.
the nominal and real exchange rates vary by a fixed amount.
Add Question Here
Multiple Choice
0 points
Question
During the era of the gold standard, the price of gold in England:
Answer
was always equal to the price of gold in the United States.

was always a little higher than the price of gold in the United States, but it could not be higher by more
than the cost of transporting gold from the United States to England.
was always a little lower than the price of gold in the United States, but it could not be lower than the cost
of transporting gold from England to the United States.
could be higher or lower than the price of gold in the United States, but not by more than the cost of
transporting gold between the two countries.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the
Answer
the exchange rate rises but income does not rise.

income rises but the exchange rate does not rise.
both income and the exchange rate rise.
neither income nor the exchange rate rises, as the money supply contracts.
Add Question Here
Multiple Choice
0 points
Question
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:
Answer
increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on
income.
decreases to keep the exchange rate unchanged, thus offsetting the effect of government spending on
income.
remains unchanged, and there is no effect of government spending on income.
remains unchanged to keep the interest rate at the world interest, so that government spending reduces
income.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to:
Answer

decrease taxes.
Add Question Here
Multiple Choice
0 points
Question
9 of 30
6/1/2012 8:52 PM
Pool Canvas
Reference: Ref 12-3
(Exhibit: IS*LM*) A small open economy with a fixed exchange rate e is initially at equilibrium A with IS* , LM* , and
2
equilibrium output Y . If there is an increase in government spending to IS* , the new equilibrium will be at ______,
1
holding everything else constant.

Answer
A
B
C
D
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-3
(Exhibit: IS*LM*) A small open economy with a fixed exchange rate e is initially at equilibrium A with IS* , LM* , and
2
equilibrium output Y . If there is a monetary expansion to LM* , the new equilibrium will be at ______, holding
1
everything else constant.

Answer
A
B
C
D
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a fixed exchange rate, if the central bank tries to increase the money supply, then in the
10 of 30
6/1/2012 8:52 PM
Pool Canvas
11 of 30
Answer
income rises.
income falls.
the exchange rate falls.
income remains constant.
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run
equilibrium the exchange rate ______, and the LM* curve shifts to the ______.
Answer
decreases; left
increases; left
decreases; right
increases; right
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply
lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money
supply to ______.
Answer
sell domestic currency to; increase

sell domestic currency to; decrease
buy domestic currency from; increase
buy domestic currency from; decrease
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply:
Answer
lead to a lower equilibrium level of income.

lead to a higher equilibrium level of income.
must be abandoned in order to maintain the fixed exchange rate.
must be offset by expansionary fiscal policy.
Add Question Here
Multiple Choice
0 points
Question
A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:
Answer
increased.
decreased.
allowed to float.
kept fixed within a band.
Add Question Here
Multiple Choice
0 points
Question
A devaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:
Answer
increased.
decreased.
allowed to float.
kept fixed within a band.
Add Question Here
6/1/2012 8:52 PM
Pool Canvas
Multiple Choice
0 points
Question
During the Great Depression, countries that devalued their currencies generally ______ whereas countries that
maintained the old exchange rate ______.
Answer
suffered longer; experienced no depression

recovered relatively quickly; experienced no depression
suffered longer; recovered relatively quickly
recovered relatively quickly; suffered longer
Add Question Here
Multiple Choice
0 points
Question
In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:
Answer
decrease but the money supply falls and income falls.

increase, the money supply increases, and income increases.
are unchanged but the money supply falls and income falls.
are unchanged, the money supply is unchanged, and income is unchanged.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in
net exports because:
Answer
investment increases.
investment decreases.
saving increases.
saving decreases.
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, under:
Answer
floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but
under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.
both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does
not.
both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does
not.
floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but
under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, under floating exchange rates a fiscal expansion:
Answer
lowers the exchange rate, but a monetary expansion raises it.

raises the exchange rate, but a monetary expansion or an import restriction lowers it.
or an import restriction lowers the exchange rate, but a monetary expansion raises it.
or an import restriction raises the exchange rate, but a monetary expansion lowers it.
Add Question Here
Multiple Choice
12 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to
______, and under flexible exchange rates expansionary fiscal policy causes income to ______.
Answer
increase; increase
increase; remain unchanged
remain unchanged; remain unchanged
remain unchanged; increase
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy
causes the exchange rate to ______ and expansionary monetary policy causes the exchange rate to ______.
Answer
rise; rise
rise; fall
fall; fall
fall; rise
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy
causes net exports to ______ and expansionary monetary policy causes net exports to ______.
Answer
increase; increase
increase; decrease
decrease; decrease
decrease; increase
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net
exports to ______ and in an economy with fixed exchange rates import restrictions cause net exports to ______.
Answer
increase; increase
increase; remain unchanged
remain unchanged; remain unchanged
remain unchanged; increase
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model, under flexible exchange rates expansionary monetary policy ______
increase income and under fixed exchange rates expansionary monetary policy ______ increase income.
Answer
can; can
can; cannot
cannot; can
cannot; cannot
Add Question Here
Multiple Choice
0 points
Question
The risk premium included in the interest rate of small open economies incorporates:
Answer
country risk and expectations of future exchange-rate changes.

the law of one price.
13 of 30
6/1/2012 8:52 PM
Pool Canvas
14 of 30
inefficient activity by arbitrageurs.

capital mobility.
Add Question Here
Multiple Choice
0 points
Question
Country risk included in the risk premium in interest rates refers to the:
Answer
additional costs incurred when loans are made in currencies other than the domestic currency.
possibility that loans in some countries may not be repaid because of political upheaval.
expectation that the exchange rate may change in the future.
potential change in the terms of trade between countries.
Add Question Here
Multiple Choice
0 points
Question
Exhibit: Risk Premium
Reference: Ref 12-4
1
LM*1. If there is an increase in the risk premium, then LM*1 will shift to ______ and IS*1 will shift to ______.
Answer
LM*2; IS*2
LM*2; IS*3
LM*3; IS*2
LM*3; IS*3
Add Question Here
Multiple Choice
0 points
Question
Exhibit: Risk Premium
6/1/2012 8:52 PM
Pool Canvas
Reference: Ref 12-4
1
LM*1. If the establishment of a new government in the country decreases the risk premium, then LM*1 will shift to
______ and IS* will shift to ______.
1
Answer
LM*2; IS*2
LM*2; IS*3
LM*3; IS*2
LM*3; IS*3
Add Question Here
Multiple Choice
0 points
Question
In order to compensate for an expected future decline in the Japanese yen relative to the U.S. dollar, the interest rate
in Japan must be ______ the interest rate in the United States.
Answer
higher than
lower than
equal to
fixed relative to
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange
rate will:
Answer
increase.
decrease.
remain constant.
either increase or decrease, depending on whether the IS* or LM* curve shifts more.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange
rate to:
Answer
increase in the present.

decrease in the present.
remain constant in the present.
decrease only in the future.
Add Question Here
Multiple Choice
0 points
Question
An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______
sufficient to offset the decline in the demand for money caused by the higher risk premium.
Answer
decrease in the money supply

increase in the money supply
decrease in government spending
fall in the price level
Add Question Here
Multiple Choice
15 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______
sufficient to offset the decline in the demand for money caused by the higher risk premium.
Answer
increase in the money supply

decrease in government spending
increase in the price level caused by more expensive imports
fall in the price level caused by less expensive imports
Add Question Here
Multiple Choice
0 points
Question
According to the Mundell-Fleming model with floating exchange rates, political uncertainty in Mexico in 1994 caused
the risk premium on Mexican interest rates to ______ and the Mexican exchange rate to ______.
Answer
increase; increase
increase; decrease
decrease; increase
decrease; decrease
Add Question Here
Multiple Choice
0 points
Question
At the end of 1994 the Mexican government was unable to maintain a fixed exchange rate because it:
Answer
ran out of foreign-currency reserves.

was unable to increase the supply of Mexican pesos.
was forced by the IMF to let the peso float.
joined an exchange-rate union.
Add Question Here
Multiple Choice
0 points
Question
Crony capitalism refers to situations in which banks make loans to those borrowers with the most:
Answer
profitable investment projects.

political clout.
ability to repay the loans.
creditworthy borrowers.
Add Question Here
Multiple Choice
0 points
Question
One argument favoring a floating-exchange-rate system is that it:
Answer
makes international trade less difficult.

minimizes destabilizing speculation by international investors.
allows monetary policy to be used for other purposes.
helps prevent excessive growth in the money supply.
Add Question Here
Multiple Choice
0 points
Question
One argument favoring a fixed-exchange-rate system is that it:
Answer
allows monetary policy to be used for stabilizing output and prices.

reduces exchange-rate uncertainty, thereby promoting more international trade.
leads to excessive growth of the money supply.
requires no actions on the part of the central bank to implement.
16 of 30
6/1/2012 8:52 PM
Pool Canvas
Add Question Here

Multiple Choice
0 points
Question
A monetary union with a common currency is an example of a:
Answer
fixed-exchange-rate system.
flexible-exchange-rate system.
small open economy.
large open economy.
Add Question Here
Multiple Choice
0 points
Question
Some economists argue that monetary union will not work as well in Europe as it does in the United States for all of the
following reasons except:
Answer
labor is not as mobile in Europe as it is in the United States.

there is no strong central government that can use fiscal policy in Europe as there is in the United States.
there is no common language in Europe as there is in the United States.
there is no European central bank as there is in the United States.
Add Question Here
Multiple Choice
0 points
Question
If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in
charge of currency A is:
Answer
running out of currency A.

running out of currency B.
generating excessive revenue from seigniorage.
ineffective fiscal policy.
Add Question Here
Multiple Choice
0 points
Question
A speculative attack on a currency occurs when:
Answer
a central bank switches from a floating to a fixed exchange rate.

investors' perceptions change, making a fixed exchange rate untenable.
a country accepts dollarization.
a central bank adopts a currency board to back the domestic currency with a foreign currency.
Add Question Here
Multiple Choice
0 points
Question
A change in investors' perceptions that make a fixed exchange rate untenable is known as:
Answer
a speculative attack.
dollarization.
seigniorage.
a floating currency board.
Add Question Here
Multiple Choice
0 points
Question
An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is
called a:
17 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
floating exchange rate.

dollarization.
monetization.
currency board.
Add Question Here
Multiple Choice
0 points
Question
When a country abandons its national currency and adopts the currency of the United States, this is known as:
Answer
a floating-exchange-rate system.
dollarization.
a speculative attack on the United States.
a currency board.
Add Question Here
Multiple Choice
0 points
Question
The principal economic loss when a country dollarizes is the loss of:
Answer
seigniorage revenue.
income tax revenue.
monetary stability.
a fixed exchange rate with the dollar.
Add Question Here
Multiple Choice
0 points
Question
The impossible trinity refers to the idea that it is impossible for a country to simultaneously have:
Answer
low inflation, low unemployment, and a rapid rate of GDP growth.

free capital flows, a fixed exchange rate, and an independent monetary policy.
high interest rates, a budget deficit, and a trade deficit.
an expansionary fiscal policy, a contractionary monetary policy, and a flexible exchange rate.
Add Question Here
Multiple Choice
0 points
Question
If a country chooses to have free capital flows and to conduct an independent monetary policy, then it must:
Answer
live with exchange-rate volatility.

restrict its citizens from participating in world financial markets.
give up the use of monetary policy for purposes of domestic stabilization.
have a fixed exchange rate.
Add Question Here
Multiple Choice
0 points
Question
If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:
Answer

restrict its citizens from participating in world financial markets.
give up the use of fiscal policy for purposes of domestic stabilization.
Add Question Here
Multiple Choice
18 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:
Answer

control its citizen's access to world financial markets.
give up the use of fiscal policy for purposes of domestic stabilization.
Add Question Here
Multiple Choice
0 points
Question
Between 1995 and 2005, China chose to:
Answer
conduct independent monetary policy, allow free international-capital flows, and maintain a fixed exchange
rate.
maintain a fixed exchange rate, allow free international-capital flows, and give up the use of monetary
policy for domestic stabilization.
conduct an independent monetary policy, restrict international-capital flows, and maintain a fixed exchange
rate.
allow a flexible exchange rate, conduct an independent monetary policy, and allow free internationalcapital flows.
Add Question Here
Multiple Choice
0 points
Question
Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?
Answer
The government has a budget surplus.

The government has a budget deficit.
The central bank's foreign-currency reserves are increasing.
The central bank's foreign-currency reserves are decreasing.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, if the price level falls, then the equilibrium income
Answer
rises and the real exchange rate appreciates.

rises and the real exchange rate depreciates.
falls and the real exchange rate appreciates.
falls and the real exchange rate depreciates.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long
run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its
natural rate.
Answer
appreciate; increase
appreciate; decrease
depreciate; increase
depreciate; decrease
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the
real exchange rate and a(n) ______ in net exports.
19 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
increase; increase
increase; decrease
decrease; decrease
decrease; increase
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-5
1
LM*1. Holding all else constant, if the domestic price level increases then the ______ curve will shift to ______.
Answer
LM*; LM*2
LM*; LM*3
IS*; IS*2
IS*; IS*3
Add Question Here
Multiple Choice
0 points
Question
Reference: Ref 12-5
1
LM*1. Holding all else constant, if the domestic price level decreases then the ______ curve will shift to ______.
20 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
LM*; LM*2
LM*; LM*3
IS*; IS*2
IS*; IS*3
Add Question Here
Multiple Choice
0 points
Question
In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary
contraction:
Answer
raises the interest rate, lowers investment and income, but does not affect the exchange rate.
raises the exchange rate, lowers net exports and income, but does not affect the interest rate.
initially raises the exchange rate, causing arbitrageurs to sell dollars and return the money supply to its
initial level.
raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers
net exports.
Add Question Here
Multiple Choice
0 points
Question
In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the
domestic interest rate increases and is just equal to ______.
Answer
decreases; minus net exports

decreases; net exports
increases; minus net exports
increases; net exports
Add Question Here
Multiple Choice
0 points
Question
In a short-run model of a large open economy, after net capital outflow is substituted for net exports in the IS curve:
Answer
the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate,
the flatter the IS curve.
the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate,
the steeper the IS curve.
if both domestic investment and net capital outflow are very responsive to the interest rate, they will tend to
cancel each other out.
the slope of the IS curve depends only on the interest responsiveness of investment and the marginal
propensity to consume.
Add Question Here
Multiple Choice
0 points
Question
In a short-run model of a large open economy with a floating exchange rate:
Answer
net exports determine the exchange rate, which in turn determines net capital outflow.
net exports determine net capital outflow, which determines the interest rate.
the interest rate is determined in the ISLM framework, and this value determines net capital outflow; then
the exchange rate adjusts to make net exports equal net capital outflow.
the interest rate determines investment and net capital outflow, which are equal within the ISLM
framework; the exchange rate then determines net exports.
Add Question Here
Multiple Choice
21 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:
Answer
the exchange rate and a fall in net exports but has no effect on income.
the money supply and an increase in income but has no effect on the exchange rate.
income, the interest rate, and net exports, but a decrease in investment and in the exchange rate.
income, the interest rate, and the exchange rate, but a decrease in investment and net exports.
Add Question Here
Multiple Choice
0 points
Question
In a short-run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease
in the interest rate and:
Answer
the exchange rate but has no effect on income.

the exchange rate, and increases in income, net capital outflow, and net exports.
the exchange rate and net capital outflow, and increases in income and net exports.
net exports and net capital outflow, but increases in investment and income.
Add Question Here
Multiple Choice
0 points
Question
A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according
to the Mundell-Fleming model with floating exchange rates, lead to:
Answer
a fall in consumption and income.

no change in consumption or income.
no change in income but a rise in net exports.
no change in income or net exports.
Add Question Here
Multiple Choice
0 points
Question
A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according
to the Mundell-Fleming model, with fixed exchange rates, lead to:
Answer
a fall in consumption and income.

no change in consumption or income.
a fall in income but a rise in net exports.
Add Question Here
Multiple Choice
0 points
Question
The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars,
will, according to the Mundell-Fleming model with floating exchange rates, lead to:
Answer
a fall in income and net exports.

a fall in income but no change in net exports.
no change in income but a fall in net exports.
Add Question Here
Multiple Choice
0 points
Question
The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars,
will, according to the Mundell-Fleming model with fixed exchange rates, lead to:
Answer
a fall in income and net exports.

22 of 30
6/1/2012 8:52 PM
Pool Canvas
a fall in income but no change in net exports.

no change in income but a fall in net exports.
Add Question Here
Multiple Choice
0 points
Question
The introduction of automatic teller machines, which reduces the demand for money, will, according to the MundellFleming model with floating exchange rates, lead to:
Answer
no change in income and net exports.

a rise in income but no change in net exports.
a rise in both income and net exports.
Add Question Here
Multiple Choice
0 points
Question
The introduction of automatic teller machines, which reduces the demand for money, will, according to the MundellFleming model with fixed exchange rates, lead to:
Answer
a rise in income and net exports.

a rise in income but no change in net exports.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:
Answer
and net exports both to fall.

to rise and net exports to fall.
to fall and net exports to rise.
and net exports both to rise.
Add Question Here
Multiple Choice
0 points
Question
In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:
Answer
and net exports both to fall.

to fall while net exports are unchanged.
to be unchanged and net exports to fall.
and net exports to both be unchanged.
Add Question Here
Multiple Choice
0 points
Question
The goods produced in U.S. industry may be made more competitive in world markets by:
Answer
appreciating the U.S. currency.

depreciating the U.S. currency.
keeping the exchange rate fixed.
expanding the money supply.
Add Question Here
Multiple Choice
23 of 30
0 points
6/1/2012 8:52 PM
Pool Canvas
Question
If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make
the net capital outflow function:
Answer
steeper, and the slope of the IS curve steeper.

steeper, and the slope of the IS curve flatter.
flatter, and the slope of the IS curve steeper.
flatter, and the slope of the IS curve flatter.
Add Question Here
Essay
0 points
Question
Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r 200 + 2(M/P),
while the IS curve is Y = 400 + 3G 2T + 3NX 200r. The function for the net exports is NX = 200 100e, where e is
the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r* = 2.5 percent.
a.
Using the LM curve, find the equilibrium level of Y in the small open economy, if M = 100.
b.
Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX?
c.
If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?
Answer a.
Equilibrium Y = 500.
b.
Equilibrium NX = 166.67.
c.
Equilibrium e = 1/3.
Add Question Here
Essay
0 points
Question
Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r 200 + 2(M/P).
This IS curve is given by Y = 400 + 3G 2T + 3NX 200r. The function for the net exports is NX = 200 100e, where
e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r* = 2.0 percent, and the exchange rate
is initially 1.0.
a.
If M = 100, G = 100, and T = 100, solve for the equilibrium short-run values of Y and NX. Is the initially
given exchange rate equal to the equilibrium exchange rate?
b.
If the Fed buys bonds in order to raise the money supply, will equilibrium Y increase?
Answer a. Equilibrium values are Y = 400 and NX = 100. The initially given exchange rate is equal to the equilibrium
exchange rate.
b. Equilibrium Y will not increase.
Add Question Here
Essay
0 points
Question
Assume that a large open economy with a floating exchange rate is described in the short run by the equations:
C = 0.5(Y T)
T = 1,000
I = 1,500 250r
G = 1,500
NX = 1,000 250e
C + I + G + NX = Y
M/P = 0.5Y 500r
M = 1,000
CF = 500 250r
NX = CF
The last two equations specify that CF, net capital outflow, decreases with r, the interest rate, and that NX, the net
exports, is equal to net capital outflow. NX is also related to the exchange rate, e, and falls when e appreciates. The
price level (P) is fixed at 1.0.
Calculate short-run equilibrium values of Y, r, C, I, CF, NX, e, private saving, public saving, and foreign saving. Foreign
saving is defined here as minus NX. Check your work by ensuring that C + I + G = Y and private saving plus public
24 of 30
6/1/2012 8:52 PM
Pool Canvas
saving plus foreign saving equals domestic investment. (Hint: As in the appendix to textbook Chapter 12, form the IS
curve from C + I + G + NX = Y, and then substitute CF for NX to get C + I + G + CF = Y. Combine with the LM curve
and solve for Y, r, and CF and then use NX = CF to get NX and the equation relating NX to e to get e.)
Answer Y = 4,000, r = 2 percent, C = 1,500, I = 1,000, CF = 0, NX = 0, e = 4, Sp = 1,500, Sg = 500, Sf = 0; 1,500 +
p
1,000 + 1,500 + 0 = 4,000; 1,500 500 + 0 = 1,000. Here S refers to private saving, S refers to government
f
or public saving (T G), and S refers to foreign saving (NX).

Add Question Here
Essay
0 points
Question
Suppose Congress cuts government spending in order to balance the budget. Use the Mundell-Fleming model with
floating exchange rates to illustrate graphically the short-run impact of the cuts in government spending on the dollar
exchange rate and output in the United States. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
levels; iv. the direction the curves shift; and v. the new short-run equilibrium.
Answer
Add Question Here

Essay
0 points
Question
Suppose the government of a small open economy with a floating exchange rate imposes 50 percent tariffs on all
imports. Use the Mundell-Fleming model to illustrate graphically the short-run impact of the tariffs on the exchange rate
and output in the country. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the
curves shift; and v. the new short-run equilibrium.
Answer
Add Question Here

Essay
0 points
Question
In early 1994, Mexico was adhering to a fixed-exchange-rate system. Use the Mundell-Fleming model to illustrate
graphically the short-run impact on the exchange rate and level of output of increased country risk caused by the
Chiapas uprising and the assassination of presidential candidate Colosio. Be sure to label: i. the axes; ii. the curves; iii.
the initial equilibrium levels; iv. the direction the curves shift; and v. the new short-run equilibrium.
25 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
The increase in the risk premium shifts IS* to IS* and LM* to LM* . To maintain the fixed exchange
1
2
1
2
rate LM* must shift to LM* .
2
3
Add Question Here
Essay
0 points
Question
a.
You are the chief economic adviser in a small open economy with a floating-exchange-rate system. Your
boss, the president of the country, wishes to increase the level of output in the short run in order to win
reelection. Do you recommend using expansionary or contractionary, monetary or fiscal policy?
b.
Use the Mundell-Fleming model to illustrate graphically your proposed policy. Be sure to label: i. the
axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the new
short-run equilibrium.
Answer
a.
b.
expansionary monetary policy
Add Question Here

Essay
0 points
Question
Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming model to
illustrate graphically the impact of an increase in the world interest rate on the exchange rate and level of output in a
small open economy with a floating-exchange-rate system. Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium levels; iv. the direction the curves shift; and v. the new short-run equilibrium.
Answer
26 of 30
6/1/2012 8:52 PM
Pool Canvas
Add Question Here

Essay
0 points
Question
Two small open economies, Fixed and Flex, can be described by the Mundell-Fleming model. The countries are
otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate
regime. The governments of both countries increase spending by the same amount. Compare what happens in the two
countries to:
a.
the exchange rate,
b.
equilibrium output, and
c.
net exports.
Answer a.
The central bank in Fixed will keep the exchange rate fixed, while the exchange rate will increase in
Flex.
b.
Output will increase in Fixed, but will be unchanged in Flex.
c.
Net exports will be unchanged in Fixed (because the exchange rate does not change), but will decrease
in Flex (because the exchange rate increased).
Add Question Here
Essay
0 points
Question
Macroland is a small open economy with perfect capital mobility and a flexible exchange-rate system. Macroland is
initially in equilibrium at the natural level of output with balanced trade. Compare the impact of a tax cut in the short run
(when prices are fixed) and in the long run (when prices are flexible) on: a) output, b) consumption, c) investment, d)
net exports, and e) the exchange rate.
Answer a.
In both the short run and long run, output is unchanged.
b.
Consumption is higher in both the short run and the long run because the tax cut increases disposable
income.
c.
Investment is unchanged in the short run and the long run because there is no change in the world
interest rate.
d.
In the short run and long run, net exports decrease by the amount that consumption increases because
the exchange rate increases. Starting from balanced trade, the country will have a trade deficit in the
short run and the long run.
e.
In the short run and long run, the exchange rate is higher because the tax cut puts upward pressure on
the domestic interest rate, which attracts capital inflows and drives up the exchange rate.
Add Question Here
Essay
0 points
Question
The government of a small open economy with perfect capital mobility wants to establish a stronger currency by
moving its exchange rate higher. Suggest both an appropriate monetary policy adjustment and an appropriate fiscal
policy adjustment that would allow the economy to move to a higher exchange rate. What are the consequences of
these adjustments on domestic output and net exports?
27 of 30
6/1/2012 8:52 PM
Pool Canvas
Answer
Contractionary monetary policy would move the economy to a higher exchange rate. Domestic output would
be reduced by the decrease in the money supply, and the higher exchange rate would reduce net exports.
Add Question Here
Essay
0 points
Question
A U.S. Congressman wants to reduce the U.S. trade deficit by imposing tariffs on imports. Use a model of a large open
economy with a flexible exchange rate to predict the impact of tariffs on U.S. imports, exports, net exports, the
exchange rate, and the interest rate.
Answer The tariffs reduce the demand for imports, raise the demand for net exports, and cause the exchange rate to
appreciate. The higher exchange rate reduces exports by an amount equal to the decrease in imports, so
there is no change in net exports or in the trade deficit. Since there is no change in saving or investment, there
is no change in the interest rate.
Add Question Here
Essay
0 points
Question
Explain how net capital outflows change in a large open economy when there is a:
a.
monetary contraction, and
b.
fiscal contraction.
Answer a.
b.
A monetary contraction increases the domestic interest rate, which will make domestic investment
opportunities more attractive and reduce net capital outflows.
A fiscal contraction decreases the domestic interest rate, which will make domestic investment
opportunities less attractive and increase net capital outflows.
Add Question Here
Essay
0 points
Question
Holding everything else constant, compare the impact of a monetary expansion in a small open economy with a
floating exchange rate and in a large open economy with a floating exchange rate on:
a.
domestic investment, and
b.
domestic output.
Answer a.
b.
Since the world interest rate does not change, domestic investment will not change in the small open
economy, but the domestic interest rate will decrease in the large open economy, which will increase
domestic investment.
The monetary expansion increases domestic output in both economies, but through different pathways.
In the small open economy the monetary expansion will reduce the exchange rate, increasing domestic
output via an increase in net exports (and induced consumption spending through the increase in
income). In the large open economy, output increases not only because of the increase in net exports,
but the monetary expansion also reduces the domestic interest rate and increases domestic investment.
Add Question Here
Essay
0 points
Question
During periods of economic downturn, there is frequently pressure to protect domestic production from foreign
competition in the belief that protectionist policies will save domestic jobs. Will protectionist policies increase or
decrease domestic production in a large open economy with a floating exchange rate, holding all else constant?
Illustrate your answer graphically and explain in words.
Answer The protectionist policies will not change domestic output. There is no change in net capital outflows, so the IS
does not shift in the ISLM model. The protectionist polices shift the NX schedule and result in a higher
exchange rate. The reduction in imports generated by the protectionist policies is met with an equal reduction
in exports as a result of the higher exchange rate, resulting in no change in net exports or in domestic output.
28 of 30
6/1/2012 8:52 PM
Pool Canvas
Add Question Here

Essay
0 points
Question
What type of monetary or fiscal policy will generate both a stronger economy (increased Y) and a stronger dollar
(increased e) in a large open economy with a floating exchange rate? Explain.
Answer Expansionary fiscal policy raises domestic output and domestic interest rates. The higher domestic interest
rates will reduce net capital outflows and increase the exchange rate, thereby generating both "stronger"
output and a "stronger" exchange rate.
Add Question Here
Essay
0 points
Question
Graphically illustrate and explain how a steep decline in the value of the stock market and housing prices would affect
the level of domestic output, the interest rate, and the exchange rate in a large open economy with a floating exchange
rate.
Answer The stock market and housing price declines reduce consumption spending and shift the IS curve to the left,
resulting in lower output and a lower domestic interest rate. The lower interest rate makes domestic
investment opportunities less attractive and increases net capital outflows, which reduces the exchange rate
and increases net exports. Thus, output, the interest rate, and the exchange rate all decline as a result of the
stock market and housing price declines.
29 of 30
6/1/2012 8:52 PM
Pool Canvas
30 of 30
Add Question Here

Essay
0 points
Question
The impossible trinity refers to the idea that a country can simultaneously pursue only two of the three following
policies: free international-capital flows, monetary policy for domestic stabilization, and a fixed exchange rate. For each
of the following combinations indicate what the economy gives up by selecting the combination and why the omitted
policy cannot be achieved:
a.
a fixed exchange rate and free international-capital flows
b.
a monetary policy for domestic stabilization and a fixed exchange rate
c.
a monetary policy for domestic stabilization and free international-capital flows
Answer a.
The economy loses the ability to use monetary policy for domestic stabilization because monetary policy
must be used to maintain the fixed exchange rate.
b.
The economy must restrict the free flow of international capital to isolate the determinants of the
domestic interest rate from the world interest rate, so monetary policy can be used to influence the
domestic economy and at the same time fix the exchange rate.
c.
The economy cannot fix the exchange rate because monetary policy is used for domestic stabilization
rather than to fix the exchange rate. The free flow of capital ensures that the domestic interest rate is
determined by the world interest rate rather than by domestic monetary policy.
Add Question Here
6/1/2012 8:52 PM

12 PDF

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

12 PDF

Hochgeladen von

Copyright:

Verfügbare Formate

Pool Canvas

allows the exchange rate to float.

the exchange rate system must have a floating exchange rate.

intersection of the LM and IS curves.

exchange rate is fixed.

output is held constant at the full employment level.

interest rate; price level

fluctuates in response to changing economic conditions.

increase government spending.

decrease government spending.

the money supply is increased.

the money supply is decreased.

income and the exchange rate will both rise.

Reference: Ref 12-1

new equilibrium will be at ______, holding everything else constant.

Reference: Ref 12-1

will be at ______, holding everything else constant.

income falls and the exchange rate rises.

interest rate falls and the level of investment rises.

but not raising net exports or income.

Reference: Ref 12-2

Reference: Ref 12-2

Add Question Here

fluctuates in response to changing economic conditions.

buy foreign currency.

arbitrageurs would sell yen in the marketplace.

was always equal to the price of gold in the United States.

the exchange rate rises but income does not rise.

decrease government spending.

Reference: Ref 12-3

holding everything else constant.

Reference: Ref 12-3

everything else constant.

sell domestic currency to; increase

lead to a lower equilibrium level of income.

suffered longer; experienced no depression

decrease but the money supply falls and income falls.

lowers the exchange rate, but a monetary expansion raises it.

country risk and expectations of future exchange-rate changes.

inefficient activity by arbitrageurs.

Reference: Ref 12-4

Reference: Ref 12-4

increase in the present.

decrease in the money supply

increase in the money supply

ran out of foreign-currency reserves.

profitable investment projects.

makes international trade less difficult.

allows monetary policy to be used for stabilizing output and prices.

Add Question Here

labor is not as mobile in Europe as it is in the United States.

running out of currency A.

a central bank switches from a floating to a fixed exchange rate.

floating exchange rate.

low inflation, low unemployment, and a rapid rate of GDP growth.

live with exchange-rate volatility.

live with exchange-rate volatility.

live with exchange-rate volatility.

The government has a budget surplus.

rises and the real exchange rate appreciates.

Reference: Ref 12-5

Reference: Ref 12-5

decreases; minus net exports