Question 1

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

Accepted Answer

Monetary policy is completely ineffective within a fixed exchange rate regime.Fiscal policy is highly effective within a fixed exchange rate regime.

Question 2

Assuming imperfect perfect capital mobility,the BP schedule is

Accepted Answer

A)  vertical.
B)  horizontal.
C)  upward sloping.
D)  downward sloping.
E)  flat. C

Question 3

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

Accepted Answer

The LM curve shows the interest rate and income that represent equilibrium points for the money market.The IS curve consists of combinations of the interest rate and income that depict equilibrium points in the goods market.The BP curve shows the combinations of the interest rate and income that will equate supply and demand in the foreign exchange market for a given exchange rate.

Question 4

Assuming imperfect capital mobility and a fixed exchange rate,then an expansionary monetary policy

Accepted Answer

A)  results in a balance of payments surplus without a conflict between domestic goals and external balance.
B)  results in a balance of payments deficit with a potential conflict between domestic goals and external balance.
C)  will shift the LM curve to the left.
D)  will have no effect on the balance of payments.

Question 5

In the Mundell-Fleming model,regardless of whether the economy has perfect capital mobility or not,an increase in the money supply

Accepted Answer

A)  reduces interest rates .
B)  increases income.
C)  decreases the trade balance.
D)  increases capital inflows.

Question 6

The BP curve shifts to the left when:

Accepted Answer

A)  the exchange rate falls.
B)  interest rates rise.
C)  income rises.
D)  imports increase.

Question 7

(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 8

Under perfect capital mobility

Accepted Answer

A)  there are no restrictions on buying financial assets,though there may be on buying factories and equipment.
B)  transactions costs have to be zero.
C)  differential risk in assets across countries are minimal.
D)  All of the above
E)  None of the above

Question 9

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 10

In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility,an increase in the money supply does all of the following EXCEPT:

Accepted Answer

A)  increase interest rates.
B)  increase income.
C)  increase the IS curve.
D)  increase inflation.

Question 11

Under perfect capital mobility and flexible exchange rates,monetary policy works through the

Accepted Answer

A)  interest rate.
B)  exchange rate.
C)  exports.
D)  Both b and c
E)  None of the above

Question 12

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

Accepted Answer

A)  a new closed-economy model.
B)  implicitly assumes a fixed domestic price level.
C)  is an open-economy version of the IS-LM model.
D)  Both b and c

Question 13

In an economy with perfect capital mobility,if domestic interest rates are above world interest rates then

Accepted Answer

A)  capital outflows will drive domestic interest rates down.
B)  capital inflows will drive domestic interest rates down.
C)  current account deficits will drive domestic interest rates down.
D)  the central bank will have to intervene even if exchange rates are floating.

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

The BP schedule will be steeper the

Accepted Answer

A)  more responsive capital flows are to the interest rate.
B)  less responsive capital flows are to the interest rate.
C)  smaller the marginal propensity to import.
D)  less likely an expansionary fiscal policy will lead to a balance of payments deficit.

Question 16

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

Accepted Answer

A)  worsen the balance on the capital account but improve the trade balance.
B)  worsen the trade balance but improve the balance on the capital account.
C)  worsen both the trade balance and the balance on the capital account.
D)  improve both the trade balance and the balance on the capital account.

Question 17

A rightward shift of the BP schedule is the result of a(n)

Accepted Answer

A)  increase in the foreign interest rate.
B)  decrease in the foreign interest rate.
C)  exogenous fall in export demand.
D)  increase in import demand.

Question 18

From the mid 1980s to the present,the United States

Accepted Answer

A)  had only a small current account deficit.
B)  had a large capital account deficit,which in the balance of payments accounts was financed with a surplus in the current account,which in turn financed investment in excess of domestic saving.
C)  has had a large current account deficit,which in the balance of payments accounts was financed with a surplus in the capital account,that in turn financed investment in excess of domestic saving.
D)  None of the above

Question 19

Assume perfect capital mobility.Under a fixed exchange rate system,expansionary fiscal policy causes income to _____,while under flexible exchange rates expansionary fiscal policy causes income to _____.

Accepted Answer

A)  increase; increase
B)  increase; remain unchanged
C)  increase; decrease
D)  remain unchanged; increase

Question 20

Empirically,there is a close positive relationship between domestic savings and investment.This is consistent with what we should expect to observe in

Accepted Answer

A)  a closed economy.
B)  the Mundell-Flemming model with perfect capital mobility.
C)  the Mundell-Flemming model with perfect capital mobility and flexible exchange rates.
D)  the Mundell-Flemming model with perfect capital mobility and fixed exchange rates.
E)  none of the above.

Exam 15: Monetary and Fiscal Policy in the Open Economy