Mundell fleming model and exchange rate regime

Question 1

What’s the difference between the IS-LM model and Mundell - Fleming model

Answer 1

IS LM is closed and MF assumes an open economy

Question 2

In the MF model, the behaviour of the open economy depends on its:

Answer 2

Exchange rate system

Question 3

Under MF, in a small open economy with perfect capital mobility, r = :

Answer 3

r*

Question 4

What does r = r* mean?

Answer 4

• r = Domestic interest rate

- r* = world interest rate

Question 5

In the MF model, what is e?

Answer 5

Nominal exchange rate

Question 6

In a floating exchange rate system, e is allowed to:

Answer 6

Fluctuate in response to changing economic conditions

Question 7

In a fixed exchange rate system, the central bank trades for foreing currency at:

Answer 7

A predetermined price

Question 8

An increase in Y shifts IS to the:

Answer 8

Right

Question 9

At any given value of e, a fiscal expansion increases:

Answer 9

Y

Question 10

In a small open economy with perfect capital mobility, fiscal policy cannot effect:

Answer 10

Real GDP

Question 11

What is crowding out in a closed economy?

Answer 11

Fiscal policy crowds out investment by causing r to rise

Question 12

What is crowding out in a small open economy?

Answer 12

Fiscal policy crowds out net exports by causing the exchange rate to rise

Question 13

An increase in M shifts LM to the:

Answer 13

Right

Question 14

Why does LM rise when M increases?

Answer 14

Because Y must rise to restore equilibrium in the money market

Question 15

Monetary policy affects output by affecting the components of:

Answer 15

aggregate demand

Question 16

Expansionary monetary policy shifts demand from foreign to:

Answer 16

Domestic products

Question 17

The increases in domestic income and employment due to ^ M come at the expense of:

Answer 17

Losses abroad

Question 18

At any value of e, a tariff or quota reduces:

Answer 18

Imports

Question 19

At any value of e, a tariff or quota increases:

Answer 19

NX

Question 20

At any value of e, a tariff or quota shifts IS to the:

Answer 20

Right

Question 21

Can import restrictions reduce a trade deficit?

Answer 21

No

Question 22

When there is an import restriction, imports are reduced, but exports are reduced due to:

Answer 22

The appreciating exchange rate

Question 23

In the Mundell-Fleming model, the central bank shifts the LM curve as required to keep:

Answer 23

e at its preannounced rate

Question 24

To keep e from rising during fiscal expansion, the central bank must:

Answer 24

Sell domestic currency

Question 25

Under floating rates, fiscal policy is __ at changing output

Answer 25

Ineffective

Question 26

Under fixed rates, fiscal policy is __ __ at changing output

Answer 26

Very effective

Question 27

An Increase in M would shift LM to the:

Answer 27

Right

Question 28

Shifting LM to the right reduces:

Answer 28

e

Question 29

Under floating rates, monetary policy is __ __ at changing output

Answer 29

Very effective

Question 30

Under fixed rates, monetary policy __ be used to affect output

Answer 30

Cannot

Question 31

A restriction on imports puts upwards pressure on:

Answer 31

e

Question 32

To keep e from rising, the central bank must sell:

Answer 32

Domestic currency

Question 33

Do import restrictions affect Y and NX?

Answer 33

• Yes under Fixed rates

- No under floating rates

Question 34

What’s the argument for floating rates?

Answer 34

Allow monetary policy to be used to pursue other goals

Question 35

What’s the argument for fixed rates?

Answer 35

Avoid uncertainty and volatility

Question 36

Why does the AD curve have a negative slope?

Answer 36

Because ^ P means falling (M/P)

Question 37

Fiscal policy affects income under fixed e but not under:

Answer 37

Floating e